How to profit from other people's good fortune

Christmas is just around the corner - but with consumers weighed down with debt and housing concerns, it may not be a merry season for retailers. However one group of consumers is well-protected from any downturn - and they are spending like mad. Here's how to take advantage...

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It's that time of year again.

Shopping malls echo to the sounds of Slade and Band Aid, while window dressers break out the tinsel and spray-foam. Yes - Christmas is upon us, and you'll be hard-pushed to forget that there are now less than six shopping weeks to go before the happy occasion.

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Christmas of course, the highlight of the retail calendar. And despite a slightly wobbly year so far, retail sales were surprisingly strong last month, up 3.9% on the same time last year, according to the Office for National Statistics.

But does that mean that Christmas will be a merry one for the high street this year?

Results yesterday from the various components of the former Gus group shed some interesting light on how this Christmas might look for retailers.

First we had the Home Retail Group. This unit houses Homebase, the DIY chain, and Argos, the catalogue retailer. Homebase has suffered, partly because rising interest rates have discouraged homeowners from borrowing money against their homes to fund DIY projects. Half-year pre-tax profits fell by almost 25% in the six months to September 30, from £52.4m to £40.8m. Chief executive Terry Duddy remains cautious' on the outlook for consumer spending.

Argos on the other hand, did rather well. The group has made strong progress in driving more of its sales online - it now generates 15% of orders over the internet. Interim pre-tax profits for the same period jumped to £72.4m from £59.2m the previous year.

But the most revealing was credit-checking group Experian. You might expect the company to be having problems - UK consumer lending on credit and store cards has slowed sharply, which means less applications to process. But the group is reaping the rewards of the other side of the slowdown - the sharp rise in bad debts. According to the Evening Standard, it is "ramping up work helping banks deal with bad debts from overstretched borrowers."

"It's heads you win, tails you win to a certain extent," said chief executive Don Robert - a very pleasant position to be in.

So what can we take from all this? It's clear that the internet has become a vital alternative shopping centre for retailers - rapidly improving technology and increased broadband adaptation means that more and more people are realising that hunting for bargains on your computer is a lot less stressful than braving the crowds on Oxford Street on a Saturday.

It also seems reasonable to conclude that housing-related sectors, such as DIY and possibly furnishings are still not reaping the benefits of the housing market's revival. Why? Well, it's probably partly because any first-time buyers still managing to get on the ladder don't have any spare cash to spend on furniture; and partly because the other side of the equation - City bonus buyers - don't tend to do up their flats by visiting Homebase.

But the main point is probably that revealed by Experian - consumers are in a lot of trouble, basically. Record numbers of people are going bankrupt, and bad debts are rising, even while spending on credit and store cards is falling. Whether that's because people are being more careful, or because - as we suspect - lenders are being more choosy about who they give cards to, is not important from the retailers point of view. What matters is that a growing number of people have no money left to spend, and that situation doesn't look set to improve. For more on the UK consumers' massive debt levels you can read our recent cover story online - just by clicking here: How to survive Britain's debt crisis

In all, against this backdrop of rising consumer debt, soaring bankruptcies, and competition from the internet (not to mention the supermarkets), it really is very difficult to see how the retail sector can possibly be a good place to invest over the coming year.

So where should you put your money? Well, there is one group of consumers aren't in any danger of going bankrupt soon - the super-rich. But they aren't going to be shopping in the likes of Argos for their Christmas presents. If you want to take advantage of these consumers' spending, you have to go a bit further upmarket.

For example, jewellery designer Theo Fennell is stocking more expensive ranges to meet demand from the wealthy and those with big City bonuses. Chairman Richard Northcott said the group had "benefited from a surge in demand for jewellery in the £200,000 price range".

So how can you take advantage of other people's good fortune? Investment bank UBS recommends, among other stocks, German car maker Porsche (for obvious reasons); UK engineer BBA, which provides ground services for business jets (after all, all those private planes dont look after themselves); and Richemont, the group behind such brands as Cartier and Montblanc.

You can read more from Simon Nixon on how to profit from the wealthy by reading his column in the current issue of MoneyWeek. And if you're not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek

Turning to the stock markets

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In London, the FTSE 100 ended 2 points lower, at 6,202. Scottish & Southern Energy was the main riser, up 4% at £14.98, as excitement over Iberdrola's interest in Scottish Power lifted the utilities sector. For a full market report, see: London market close

Elsewhere in Europe,the Paris CAC-40 closed up 4 points at 5,459, whilst the German DAX-30 was 8 points higher, at 6,460.

On Wall Street, the Dow Jones gained just 5 points to 12,321. The Nasdaq rose 2 points to close at 2,454, while the S&P 500 gained 2 to 1,402. Internet search giant Google topped $500 a share for the first time.

In Asia, the Nikkei 225 climbing 180 points to 15,914, rebounding from recent declines.

The price of crude oil edged lower in New York this morning, trading at around $59.90 a barrel, whilst Brent Spot was at $59.60.

Spot gold was higher, trading at around $629.20 an ounce.

And in London this morning, credit checking specialist Experian has reported a 12% rise in first-half profit as the number of Americans checking their credit ratings rose sharply.

And our two recommended articles for today...

What does US political turmoil mean for the world?

- Stephen Roach reflects on America's stunning political upheaval - find out what he believes it all means for the global economy, by clicking here: What does US political turmoil mean for the world?

How long can the stock market stay strong?

- The bulls seem to be on top in the stock market at the moment, say John Robson and Andrew Selsby of RH Asset Management - but with threats to housing markets on both sides of the Atlantic, how long can the good times continue? Find out, by clicking here: How long can the stock market stay strong?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.