In February, major US brokers such as Marsh & McLennan , Willis Towers Watson, Aon and Arthur J. Gallagher & Co. declined by 8%-11% in a single day on news that OpenAI, the owner of ChatGPT, had approved the first insurance-focused AI app designed by US intermediary Insurify. OpenAI's tool arrived a week after Claude, the model developed by Anthropic, also released a new plug-in to automate sales, legal and financial analytical functions.

As well as this risk of obsolescence, investors have had to try to factor in the growing challenges of a so-called “soft” insurance market. Since 2017, the insurance market has been in a “hard” phase, where prices have been rising, and profits have jumped. However, two years ago, prices started to flatten and then fall as the market turned from hard to soft. The hard market was very good to Marsh & McLennan (NYSE: MRSH). Between 2017 and the beginning of 2024, shares in the broker and global-intelligence company rose more than 200%, but since topping out in the first half of 2025, they have fallen by around 28%.

This decline was needed. Insurance is a highly cyclical business and, coming into the soft cycle, Marsh was trading at about 22 times forward earnings, a multiple that left little, if any, room for error. After the re-rating, the shares are now trading at just 16.8 times forward earnings, according to UBS. That is still a bit high for this stage of the market cycle, but there's a good argument that you should start buying the shares at this level.

Marsh & McLennan plays an important role in the insurance market

Marsh & McLennan is the parent firm of Marsh Inc, one of the world's largest risk-management and insurance-services firms. The group also owns Guy Carpenter, a risk-management and reinsurance specialist; management consultancies Mercer, plus Oliver Wyman and Jardine Lloyd Thompson Group (JLT), an insurance, reinsurance and employee-benefits broker based in London.

The group's largest division is Marsh Risk, which generated $14.4 billion in revenue in 2025. The second largest is Mercer, with revenue of $6.2 billion, and Marsh Management Consulting, at $3.6 billion. The total consulting business turns over $9.8 billion a year. The risk-management and insurance businesses (including Marsh Risk) generated $17.3 billion in revenue.

Marsh Risk plays an important role in the insurance market. Large, complex risks are often underwritten by pools of insurers and reinsurers bought together by brokers. The insurers like it because they're not overly exposed to a single risk, and the buyer of insurance likes the security of multiple parties underpinning the contract. Marsh Risk helps navigate this process. The company also manages the claims process, which most large insurers and reinsurers don't have the capacity to handle, as it can be costly and time-consuming.

For example, Marsh has helped set up a clean hydrogen insurance facility, where developers pay an insurance premium, and Marsh negotiates insurance coverage with insurers to transfer the risk from the project owners' balance sheets. Investors (in this case, the insurers) provide capital investment for the projects, with their risk exposure mitigated by tailored insurance coverage. In the event of insured incidents, Marsh manages the claims process. The single platform helps lower costs for all involved.

It's hard to imagine a world where AI disrupts this process. It will certainly help streamline the paperwork, but the human touch of the Marsh brokers will always be required to navigate deals among key stakeholders. This business is highly profitable and cash-generative. The insurance arm booked an adjusted operating margin of 32% last year, compared with 21.1% for consulting. Of the $7.3 billion in adjusted operating income, $5.3 billion fell to the bottom line as operating cash flow. The company's return on invested capital, a measure of profit for every £1 invested in the business, is 25%.

How Marsh is embracing AI

The real AI threat is to Marsh's consulting arm, but even here, the company claims it is addressing the potential risk. In the company's first-quarter results, it said Oliver Wyman's AI Quotient, which helps firms deploy and scale AI tools, has advised on upwards of $50 billionin AI investment. This helped the consulting arm outperform in the first quarter, with Oliver Wyman recording revenue growth of 6%, ahead of group top-line growth of 4%.

Management is deploying these tools internally to help reduce costs. It's targeting a total of $400 million in savings over three years and has logged a 20% improvement in efficiency through AI-powered document processing. Other tools have saved an estimated one million hours of the team's time in the first year. UBS estimates this could help drive Marsh's return on invested capital to near 30% by the end of the decade.

So while the market frets about the risk AI poses, the company is quietly leveraging the technology to enhance its own services. This suggests that, if anything, the firm is an AI play.

Marsh's most important assets are its people and technology, and while it spends heavily on both, overall capital spending requirements are low. As a result, most of the cash generated from operations converts to free cash flow. Management has set out to return as much cash as possible to investors. At the end of last year, management authorised a $6 billion share buyback, with $750 million deployed in the first three months of the year. While the market was selling, Marsh was buying its own shares.

Cash flow is the firm's most attractive quality. While the shares might not look too cheap on a price-earnings basis, according to UBS, the shares are trading at a forward free cash-flow yield of 6.2% for 2026, 6.7% for 2027 and 8.1% for 2030.

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From acorns grow oak trees: that's the sales pitch from fans of the Seed Enterprise Investment Scheme (SEIS), though the scheme's offer of more generous tax incentives than any other similar investment initiative is also part of the appeal. And with other opportunities to shelter from rising taxes now diminishing, many experts think the SEIS is set to become more popular than ever in the current tax year, which began earlier this month. Introduced in 2012, the SEIS aims to help very small and very young companies raise money to fund their growth. These are businesses that may lack the trading record necessary to borrow money from the bank, or to raise capital from other sources. Without access to finance, their growth may be stunted, preventing them from fulfilling their potential.

We really are talking about acorns. Raising money through the SEIS is only an option for businesses that have been trading for less than three years, which have assets of no more than £350,000 and fewer than 25 employees. There are also several more technical qualifying rules that limit SEIS eligibility to start-ups and very early-stage businesses. Inevitably, many of these businesses fail, taking investors' money with them. A recent study from Warwick Business School put the three-year survival rate for start-ups in the UK at 47% – falling to just 10% after ten years. Even businesses that show some early success – those that might therefore catch investors' eyes – often don't progress. Just 7% of businesses making it to £1 million of turnover go on to surpass £3 million, the Warwick study found.

That said, some start-ups do turn into scale-ups. New investors come in at higher valuations; SEIS investors who took the early risks may be able to exit at a handsome profit. It's even possible for SEIS-backed firms to make it all the way to a stock market listing.

SEIS can offer some extraordinary tax breaks

One example of a successful SEIS investment is Cognism, now regarded as one of Europe's leading data technology companies. The business raised SEIS funding in 2017, two years after its launch, with investors then able to exit when the business secured new backers in 2022; their returns were estimated to be worth around 40-times their initial stake. Only a handful of such winners can be rocket fuel for a SEIS portfolio, says Alex Davies, founder and CEO of investment platform Wealth Club. “The SEIS offers the chance to back very early-stage businesses with genuine high-growth potential, while recognising that most won't succeed,” Davies says. “The key is that you don't need many winners to generate significant returns.”

In part, that's because a few very large gains will compensate you for losses elsewhere. But the tax incentives offered on the SEIS – the government recognises that investors need some encouragement to risk their money – also provide plenty of insulation. Those tax breaks genuinely are quite something. You can invest up to £200,000 each tax year through the scheme, but you get 50% income-tax relief on this subscription, reducing its cost by half as long as you're earning enough to claim relief in full. In addition, you can claim capital-gains-tax reinvestment relief – if you've got taxable profits on other investments, you can reduce the bill by 50% by reinvesting these gains through the SEIS.

There's also support later on. Once you've held shares in a SEIS company for three years or more, any profits you make on the investment are free from capital-gains tax. Alternatively, if the business goes bust, you can claim loss relief, setting your losses against other taxable income you may have. SEIS investments also get preferential treatment on inheritance tax. The first £2.5 million worth of qualifying investments don't count towards the value of your estate for inheritance tax (IHT) purposes; on investments above this threshold, IHT is charged at only 20%, half the usual rate.

The combined effect of all these reliefs is significant. “SEIS tax reliefs turbocharge returns when things go well and cushion the impact when they don't,” explains Davies. “In today's high-tax environment, it's increasingly difficult for non-tax-advantaged investments to compete.” If you invest £100,000, say, in a portfolio of SEIS investments that returns 50%, your effective gain after income tax and capital-gains reinvestment relief will be 112%. But even if there's no growth and you only get your starting capital back, you would still be making a 62% gain.

Alternatively, the tax reliefs limit downside risk. If your £100,000 investment halves in value, you'll still be making a positive return of 12% after the income-and capital-gains tax breaks. Or, in the worst case scenario, where your investment ends up worthless, the actual loss on your initial £100,000 stake would only be £15,500.

Such perks look even more attractive given that the tax reliefs available on similar schemes are being reduced. The upfront income-tax relief on offer to investors in venture capital trusts (VCTs) – which also invest in early-stage businesses – fell from 30% to 20% on 6 April. At the same time, the tax burden that investors in these schemes are often looking to mitigate is increasing. Most notably, the IHT net will shortly be extended to include unused pension savings, while exemptions for business and agricultural assets are being eroded. Together with an ongoing freeze on the thresholds at which IHT becomes payable on estates, this has the potential to drive up bills for many families.

In fact, the SEIS is one of the few tax-efficient investment schemes to offer relief on IHT – along with its big brother, the Enterprise Investment Scheme (EIS). Cash and assets held within an individual savings account (ISA), for example, will count towards the value of your estate for IHT purposes. The same is true of VCTs. No wonder that the SEIS is attracting more interest, with investment in qualifying businesses already on an upward trend. “The SEIS is a key part of the UK's dynamic start-up environment, and recent changes with the reduction of tax relief for VCT investors make it even more attractive by comparison,” says Matt Cooper, co-CEO of the private market investment platform Crowdcube.

Pause and think about the risk

In the 2023-2024 tax year, the most recent period for which data is available, 2,290 companies raised £242 million through the SEIS, up more than 50% on the previous year, partly thanks to a tweak to the rules that enabled more companies to participate and to raise more money. Almost 10,150 investors put money into companies qualifying for the scheme, a 23% increase compared to the 2022-2023 tax year. The early indications are that the SEIS saw further growth in 2024-2025, with HM Revenue & Customs receiving 3,195 applications for “advanced assurance” – essentially requests from companies for guidance that they qualify for the SEIS scheme before they seek investment. That was 18% more than in the previous year.

Nevertheless, investing in the SEIS simply for tax reasons would not be sensible. Given the elevated risk profile of SEIS companies, this is an investment only suitable for wealthy and sophisticated investors who feel comfortable with the possibility of losing some or even all of their money. You will almost certainly have made good use of ISA and pension allowances before thinking about the SEIS; you may well have invested in VCTs and the EIS too. Also, remember that the scheme is most tax-efficient for investors who have other capital gains to roll over into it.

Still, the good news from an investment perspective, argues Joseph Zipfel, the chief investment officer of early-stage investment specialist SFC Capital, is that the SEIS has matured since its launch more than a decade ago. “The risk profile has changed materially,” he says. “While early-stage investing will always carry risk, the underlying quality, maturity and resilience of SEIS-backed companies has improved over the last ten years.”

The explanation, Zipfel believes, is that the UK's start-up ecosystem has improved markedly in terms of the amount of support available to entrepreneurs, with help on offer from universities, incubators, accelerators and government-backed organisations such as the British Business Bank and Innovate UK. Business founders are more sophisticated as a result – and the backing available has encouraged a broader range of people to launch their own enterprises.

Moreover, many SEIS-eligible businesses are now run by more experienced founders. “The SEIS has funded more than 2,000 companies every year for more than a decade; one of the most important consequences of this scale is the recent emergence of a second wave of entrepreneurs building their second or third venture,” Zipfel adds. “These founders bring hard-earned lessons from their first businesses, whether successful or not. They are typically more disciplined in capital allocation, clearer on go-to-market strategy, and faster at identifying what does not work.”

Add in the changes to the SEIS rules made in 2023, which saw slightly larger businesses become potentially eligible, and the overall picture is of a more resilient set of opportunities. “This evolution does not eliminate risk,” says Zipfel, “but it does mean that the starting point is much stronger and the overall risk-adjusted opportunity has improved materially.”

How to invest in the SEIS

There are two ways to take advantage of the investment opportunities and tax incentives that the SEIS offers. Your first option is to invest directly in a qualifying company that is currently raising money. The firm will need to have checked its SEIS eligibility with HMRC and should be able to tell you that it has received assurance that investments are likely to qualify.

The easiest way to find such opportunities is via a crowdfunding site – an online platform where early-stage companies appeal directly to retail investors. Platforms including Crowdcube, Crowd for Angels, Republic Europe (until recently known as Seedrs) and SyndicateRoom all feature SEIS-eligible businesses making pitches to investors.

The advantage of investing directly is that you have total control over which firms you decide to back. The downside is that it may be harder to spread your bets – you'll need to invest in multiple qualifying companies to avoid the danger of being exposed to a single high-risk business, or even a small handful. You'll also need to do your own due diligence.

Option two, therefore, tends to be more popular. Many investors opt for a SEIS fund – essentially a portfolio of ten to 25 or so qualifying companies chosen by a professional investment manager who specialises in investing in early-stage companies. Specialists in this area include Fuel Ventures, Guinness, Haatch and SFC. Wealth Club is one central point of access to a choice of SEIS funds.

With a fund, you get diversification and the benefit of the manager's expertise and experience. Funds may also have access to a wider range of opportunities, including attractive companies not on your radar. Investing in SEIS funds can also be a useful way of spreading risk, “although this needs to be balanced against the likelihood of higher returns from a direct individual investment if it goes well”, says Crowdcube's Matt Cooper.

There are downsides to the fund approach, too. Expect to pay much higher charges than on other types of collective investment funds, which will dilute your returns. You'll also be surrendering control of investment decisions and losing the direct relationship with individual firms, which many investors enjoy.

Finally, note that once you've made your investment, the business or fund will send you a form so that you can claim the various tax reliefs through your self-assessment tax return. This paperwork – known as the SEIS3 form – is critical; you won't be able to apply for relief from HMRC without it.

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Shares in luxury goods giant Hermès (PA:RMS) tanked on 15 April following warnings of a sales slowdown in its key market. But despite the luxury sector facing obvious challenges, some analysts think that there is a buying opportunity for bargain-priced luxury stocks, especially if you can spot the hidden gems.

March was a choppy month for the stock market, with the direction of travel made clear by investors’ buying trends. As the Iran war shook global outlooks, investors bought up defence and energy stocks, and went cautious in a bid to protect portfolios from volatility and profit from higher oil prices.

Hermès shares fell 8% on Wednesday, having been down more than 14% at one point in the day. The Middle East region had been the company’s fastest-growing market, but quarterly sales in the region fell 6% in constant exchange rate from the same period a year prior.

“Sales in the Middle East have, unsurprisingly, been most affected, but so too have sales in China – one of the luxury sector’s most important regions,” said Emma Wall, chief investment strategist at investment platform Hargreaves Lansdown. “Hermès also revealed sales in Paris are down, as fewer shoppers undertake international travel.”

Since the start of the conflict in Iran, Hermès shares are down 25%.

LVMH (PA:MC) – which owns the iconic Moët & Chandon, Hennessy and Louis Vuitton brands – saw its share price fall as much as 2.7% on Wednesday, though they recovered most of these losses later in the day. But LVMH shares too are down 14% since the start of the conflict.

There is clearly pressure on luxury stocks, but do the recent falls constitute a buying opportunity?

Why invest in luxury stocks?

In normal times there is a compelling investment case for luxury goods stocks, in that they subvert many of the normal rules of economics. Higher prices, if anything, increase demand for high-end luxury goods, and while most businesses invest heavily in scaling their production as much as possible, it can reward luxury firms to keep their product lines small and their goods exclusive.

“Hermès are very good at what we call ‘capsule collections,’” said Angeline Ong, senior investment analyst at trading platform IG. “They might make 500 silkscreen printed scarves, they have a number for every one… This means that they continue to have prestige, and they have pricing power.”

This gives them a certain level of resilience. Raw materials costs are often a relatively small component of luxury goods pricing, so inflation doesn’t force them to raise prices. If it does, they can easily pass these on to relatively price-unconscious customers.

But because they are non-essential, falls in luxury goods sales often pre-empt a downturn in the global economy.

“At a starting price of £12,000 a pop, Hermès Birkin handbags may not be considered essential expenditure for the vast majority of the global population, but luxury goods sales are often a leading indicator of economic growth and so market watchers are paying attention,” said Wall.

Is there a buying opportunity in luxury goods?

Data from market research firm Morningstar suggests that luxury stocks appear attractively priced at the moment, with two-thirds of the stocks in the sector currently trading below ‘fair value’ – perhaps understandably, given the pressure that the sector is under.

But Morningstar doesn’t expect this pressure to last too long.

“We expect limited direct impact from the conflict, with regional sales in the mid- to high-single digits for most luxury companies, although we are wary of the impact on oil prices, inflation, interest rates, GDP and markets,” said Jelena Sokolova, senior equity analyst at Morningstar.

“Based on the industry's past 30 years, periods of subdued demand didn't last more than two years,” Sokolova added. “We also believe that the moats in luxury remain intact and that fundamental growth drivers, notably potential for demand recovery from American and Chinese consumers, remain strong.”

The S&P Global Luxury Index – which consists of 80 of the world’s largest luxury goods stocks – is down 7% so far this year, but was on a strong run before the war broke out, generating a total return of 20% over the past 12 months.

How to invest in luxury goods

If you feel confident that the luxury goods industry will bounce back from the current turmoil, there are several ways that you can invest.

You could buy individual stocks such as LVMH or Hermès.

Isabel Fairlie, equity analyst at wealth manager Charles Stanley, picks out Richemont (CFR:LISN) as a potentially durable option.

“Across the wider sector, absolute luxury has consistently outperformed aspirational brands, with hard-luxury revenues materially outpacing soft luxury over the past eight quarters,” she said. “Richemont is a direct beneficiary of this trend. Its Jewellery Maisons, including Cartier and Van Cleef & Arpels, continue to report robust growth, underpinned by sustained demand in the US, which now exceeds the size of its China business.”

If you prefer to invest in funds, you could consider Amundi Global Luxury (LON:LUXG). This exchange-traded fund tracks the S&P Global Luxury Index; top holdings (as of 14 April) include Richemont, LVMH, Hermès and Ferrari (NYSE:RACE).

Or fans of actively-managed funds could select the GAM Luxury Brands Equity Fund, which typically holds 25-35 luxury companies globally.

Just five years ago, plant-based foods were all the rage. Beyond Meat, a US-based maker of plant-based vegetarian burgers and sausages, listed in a blockbuster initial public offering (IPO) and started producing the McPlant for McDonald's. Rival Impossible Foods launched a meatless version of the Whopper for Burger King; bakery chain Greggs rolled out a much-vaunted Quorn-based vegan sausage rolls and consumer-goods giant Nestlé created a faux-meat line of burgers.

Plant-based meat alternatives mimic the taste and texture of meat using high-protein plant sources such as soy and peas, or wheat gluten. As these became more readily available, they were added to menus and pure-play vegetarian and vegan restaurants popped up on high streets. Consumers were embracing healthier lifestyles and seeking environmentally friendly, sustainable alternatives to meat; they had also become more concerned about animal welfare. Most plant-based meat alternatives produce lower greenhouse gas emissions and water footprints than the meat industry produces. They also have fewer calories, lower saturated fat and higher fibre levels on average than their meat counterparts.

Plant-based foods go from boom to bust

Investment funds focused on sustainability took an interest. “Several thematic strategies, including dedicated funds and exchange-traded funds [ETFs], were launched to capture [the] opportunity, and sustainable food systems were increasingly incorporated as a core theme within broader ESG [environmental, social and governance] and climate strategies,” says Tara Irwin, senior ESG analyst at investment platform Hargreaves Lansdown.

The market for plant-based protein was estimated at $14 billion in 2024 and was expected to grow more than 7% annually to reach $20 billion by 2029, says data-analysis group Research and Markets. But the buzz around plant-based foods has died out lately. Restaurant chains have cut back on plant-based options. Apart from the McPlant, McDonald's has got rid of its vegan options; Pret has closed its vegetarian-only branches, and Impossible Food's rumoured initial public offering has failed to materialise.

Meanwhile, Beyond Meat, a market darling when it became the first firm offering a plant-based alternative to meat to list in 2019, raising $240 million and achieving a $1.5 billion valuation, has yet to turn a profit. Sales have slid since 2022 and debts are high. It launched a debt-for-equity swap in October to stave off a credit default. Its woes mirror the waning sales of plant-based foods and shifting sentiment among consumers. In Britain, sales fell 4.5% to £898 million in the fiscal year to January 2025, according to the Good Food Institute Europe. US plant-based meat sales declined for three consecutive years to $1.1 billion in 2024, according to data from Circana.

Consumers have become more sceptical about ultra-processed foods and have focused more on other protein sources, such as chicken, beans and pulses. A US study concluded that ultra-processed foods “share more characteristics with cigarettes than with minimally processed fruits or vegetables and therefore warrant regulation commensurate with the significant public health risks they pose”.

The increasing prevalence of GLP-1 weight-loss drugs, such as Ozempic and Mounjaro, has also hastened the collapse in demand by suppressing appetite, while not all consumers want to eat food that has been artificially designed to taste like real meat. According to food and drink research firm Lumina Intelligence, pubs and bars have been reducing the vegetarian and plant-based dishes they offer and doubling down on higher-margin meat dishes, while restaurants have been expanding menus with mostly meat options in the first quarter of 2025, compared with the same period a year earlier.

Although sales are declining, some analysts have attributed this to demand normalising after an initial boom amid changing tastes and inflation for food producers, hospitality businesses and consumers. Veganism is no longer considered niche and has become mainstream. Pret A Manager said that it only closed its standalone Veggie Pret branches because people were buying vegan options at all its outlets. “Every Pret is a Veggie Pret shop,” it has declared. “Plant-based foods are far from a passing trend, but the landscape is evolving,” says Seyi Oduwole, head of food and drink at strategic consultancy The Future Laboratory.

Amid a growing “counter movement” of renewed interest in a carnivorous diet and animal-based foods, some consumers are opting for “more flexible, balanced diets rather than committing exclusively to plant-based or animal-based extremes”. This year's Veganuary, where people commit to a vegan diet for January, saw a record-breaking 30 million people take part globally, up from 25.8 million last year. The buzz around plant-based foods has not totally fizzled out.

What is lab-grown meat?

In the meantime, the more novel area of cultured food – lab-grown meat could replace vegetable beef-burgers from cells initially extracted from a living animal – is gaining traction and could be a new frontier in the food industry. It could resonate with younger, ethically conscious consumers. “The key to broader adoption will be marketing these products not just as alternatives, but as the next stage in sustainable, high-quality foods that are accessible, ethical and even indulgent,” says Oduwole.

Lab-grown meat could help address global food insecurity amid climate change, overfishing and shrinking resources. Britain imports half of its food and geopolitical conflicts and climate change can disrupt energy and food-supply chains.

A growing global population will need to produce around 50% more food, feed and fibre by 2050 compared with 2012, putting further pressure on land and water systems, according to the UN's Food and Agriculture Organisation. Global meat consumption is expected to increase 14% by 2030 compared with the average level between 2018 and 2020.

Lab-grown meat has a lower environmental impact than traditional livestock do, as it uses less water and land. It reduces carbon emissions by up to 92% compared with beef production and 44% for pork production, according to environmental consultancy CE Delft. This is a big selling point for companies, says Oduwole, “especially as sustainability becomes an even more urgent priority for consumers and investors”. But the difficulty for outfits such as Steakholder Foods, which is developing technologies such as 3D-printed seafood, lies in expanding: start-up costs are high.

Lab-grown meat – from petri-dish to plate

Lab-grown meat, dairy and sugar are set to enter the UK market in 2027, with the Food Standards Agency reportedly expediting the approval process. They are already available in the US, Australia and Singapore. Although there is scepticism over whether Britons will develop an appetite for laboratory-grown food, they could accept it if it's marketed as a “premium, ethical indulgence”, reckons Oduwole – witness fine dining's early backing of cultivated meat.

Australian food-technology start-up Vow plans to provide cultured quail dishes to upmarket restaurants, and San Francisco-based Michelin-starred restaurant Bar Crenn served laboratory-grown chicken to diners in 2023. Northern-Irish food manufacturer Finnebrogue and Oxford-based biotech firm Ivy Farm Technologies are to create cultivated wagyu beef burgers for the UK market. Real wagyu beef costs up to £165 per pound. This suggests that laboratory-grown food will probably be adopted in high-end markets before entering the mainstream.

It will probably also take time for the industry to become lucrative for investors. “While plant-based and laboratory-grown foods can offer long-term potential, both sectors face structural challenges that limit their near-term investment appeal,” says Jeneiv Shah, global equities portfolio manager at London-based asset manager Sarasin & Partners.

Where to look now for fat profits

There are few publicly listed plant-based and lab-grown meat companies for investors to consider and the ones that are listed, such as Beyond Meat, are struggling. Although laboratory-grown foods could address some of the limitations of plant-based food with respect to taste, texture and a feeling of authenticity, says Shah, they may struggle to find their feet.

Potential obstacles include “regulatory constraints, labelling challenges, uncertain consumer adoption” and high costs. Nonetheless, with plant-based, vegan food losing momentum, laboratory-grown food could be the next trend. But no clear front-runner has emerged to take advantage of the shift in how food could be produced.

Where does that leave investors? Hargreaves Lansdown's Tara Irwin says investors see plant-based and lab-grown meat as important for decarbonising food systems, but they are treading carefully, rattled by the firms' volatile performances and consumers' unexpectedly slow adoption of the products in some markets. Investors are placing greater emphasis “on scalability, cost competitiveness and commercial viability, rather than sustainability credentials alone”.

Irwin points to the Pictet Nutrition fund, which invests across the food-value chain and focuses on improving the sustainability and resilience of food systems. The Schroders Global Sustainable Food & Water fund “emphasises food-system resilience beyond alternative proteins”. Impax's Sustainable Food Strategy fund, meanwhile, invests across supply chains, targeting resource efficiency and nutrition, thereby reflecting a “wider shift away from concentrated exposure to alternative proteins towards more balanced, system-level opportunities”.

A more focused alternative

Agronomics (Aim: ANIC), co-founded by veteran investor and MoneyWeek favourite Jim Mellon, skews more heavily towards alternative proteins. The firm has invested in more than 20 cellular-agriculture businesses that aim to make the food industry more sustainable. Investments include Good Startup, an early-stage investment fund backing companies developing sustainable protein and food technologies for fermentation and alternative proteins, and Bond Pet Foods, which produces animal proteins through fermentation.

Mellon has also founded the private-investment vehicle New Agrarian, which also focuses on cellular agriculture companies, but is mostly intended for Middle Eastern investors. New Agrarian's investments include Meatly, which develops cultivated pet food, and Onego Bio, a maker of egg-protein powder produced via fermentation. Amid cooling demand and capital flows to the alternative protein market, New Agrarian is focusing more on dairy and egg proteins – areas where “the consumer probably doesn't have a significant resistance to [alternative protein]”, Mellon told the publication New Private Markets.

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In March 2020, the global leisure and travel sector spluttered to a sudden halt as the coronavirus pandemic spread around the world. International travel dropped by more than 99% almost overnight; shares plunged and companies rushed to secure cash. The nightmare lasted throughout the rest of the year. Despite some easing of restrictions, activity in the UK and US leisure sectors ended the year down around 50% year on year.

However, while the shutdown initially appeared to be terminal for the sector, the pandemic marked the beginning of a global tourist gold rush. According to Boston Consulting Group (BCG), travel for leisure was worth $4 trillion a year globally in 2019. That number hit $5 trillion in 2024, up 25% in five years despite the pandemic. And growth is not expected to slow. BCG estimates the global market will hit about $8 trillion by the end of the decade and $15 trillion by 2040.

As the leisure and travel market has grown over the past five years, it has also changed dramatically. Pre-pandemic, travel spending followed GDP closely, but the market has since experienced a decoupling as consumers increasingly prioritise “memorable experiences” over material goods. The so-called “experience economy” is now a multi-trillion-dollar industry, with research from Barclays putting the size of the market at $5.2 trillion to $8 trillion, with projections showing it could reach $12 trillion or more by 2028-2035. The “experience economy” is not the same as the global leisure and travel industry, but there's a high level of overlap. It represents a significant shift in consumer spending, where people prioritise unique, shareable “moments” (travel, dining, events) over physical goods, which goes some way to explaining why leisure travel has had such a resurgence.

Why are leisure and travel becoming so popular?

There are two main tailwinds driving these shifts. The first is the demand for experiences over material goods by the millennial generation. Barclays estimates that roughly three-quarters of millennials want to spend on experiences rather than products, and the income across this group is growing faster than the rest of the economy.

Data compiled by the US Federal Reserve Board's Survey of Consumer Finances, for example, shows that those born in the 1990s saw their median wealth more than quadruple to $41,000 over the three-year period between 2019 and 2022. In 2024, millennials' net worth increased by 12.74% in 2024, while Generation X and Boomer wealth rose by 6.5% and 2.7%, respectively. All told, millennials had accumulated $15.25 trillion as of the second quarter of 2024. That's up significantly from $3.93 trillion just five years earlier. The wealth of Generation Z (born between 1997 and 2012) is growing even faster, up nearly 22% on average in 2024.

These figures are related to the US, where a combination of rising equity markets, property prices and wage growth has helped the two younger cohorts. However, similar trends have been observed around the world, where it's not just the rise of the millennial consumer that's driving growth, but the growth of the middle classes as a whole. According to Oxford Economics, the middle-class population in emerging markets is set to double over the next decade, expanding from 354 million households in 2024 to more than 670 million by 2035.

The World Economic Forum notes that, by 2030, 70% of new middle-class households will be in Asia, with China and India leading the trend, and the number of households with an annual disposable income of $45,000–$100,000 (at purchasing power parity) is rising by 5.6% annually. By 2035, more than a billion additional people will join the global consumer class, with four out of five coming from emerging markets.

K-shaped growth in spending

The second tailwind is the so-called K-shaped growth of consumer spending. The middle classes might be spending more on experiences in aggregate, but it's the rich who are really spending the most on travel and leisure. According to new research from Resonance Consultancy, the top 10% and top 1% of American households now account for more than half of all US consumer spending, and collective leisure expenditure is projected to reach $544 billion in 2026 – a little more than 10% of the total global market.

The top 10% of households by income ($240,000 to $600,000 per year) are expected to take 4.3 leisure trips in 2026 and spend an average of $7,900 per trip, up from $5,100 in 2022. Meanwhile, the top 1% (income of $600,000 plus with a net worth or $13 million or more) are expected to take six trips in 2026 and spend an average of $12,400 per trip, up from $8,400. In contrast, the consultancy estimates the average American consumer takes around 2.8 trips on average per year and spends $3,700.

And it's not just rich Americans that are driving the trend. The global jet-setting class is powering the industry worldwide, driving up demand for high-end travel experiences. What's more, consumers of all income groups seem reluctant to cut spending on travel and leisure, no matter how tough the economic outlook might appear.

A recent survey from ABTA, the travel-trade association, found that travel would be the last area consumers would cut back on due to cost-of-living challenges. Just 32% of respondents said they would reduce holiday spending – a smaller proportion than would cut out gadgets, clothes, eating out or leisure activities such as going to the cinema. The same is true for consumers in the US, where a recent YouGov survey showed that 71% of consumers prioritise travel spending even when cutting back on other discretionary areas such as dining out or fashion.

How can investors profit from the leisure boom?

There are multiple ways for investors to ride the trend. The first is to buy in to the airline sector, which is not for the faint of heart. Airlines are highly competitive, operating on razor-thin profit margins. Rising fuel costs or fare wars can wipe margins out overnight, leaving carriers desperate for income to cover aircraft lease costs or with debt built up from acquiring fleets. Independent carriers also have to contend with state-backed players, which can afford to run routes at a loss. While some airlines, such as easyJet, Jet2 and British Airways (owned by FTSE 100 group IAG) have managed to diversify their income streams by expanding into the package holiday market, it's not enough to remove the risks outlined above. In my view, Tui also falls into this market.

In many respects, the global cruise industry has to deal with the same headwinds. The likes of Carnival Corporation (NYSE: CCL), Royal Caribbean Group (NYSE: RCL) and Norwegian Cruise Line Holdings (NYSE: NCLH) all operate in a highly competitive market and there are ongoing issues with capacity. Fuel costs are also a major headache. Carnival recently said its fuel costs could rise by 40% in the current quarter, and despite a record number of bookings, it has had to cut its outlook as a result. Like airlines, cruise firms also tend to carry a lot of debt in order to build the massive vessels required to operate in the business.

The one exception to this rule is Lindblad Expeditions Holdings (Nasdaq: LIND). This company is best known for its long-standing strategic partnership with National Geographic, which gives it access to some of the world's most exclusive travel experiences. It maintains a fleet of 23 owned and chartered vessels, including state-of-the-art polar ships such as the National Geographic Endurance and National Geographic Resolution, some of the only vessels in the world to have the rights to explore regions of the world such as the North and South Poles and the Galapagos Islands. It has also inked a strategic partnership agreement with Disney, and sales via this channel grew 35% in the last quarter.

Lindblad has tapped into the high-end experience market with its unique offering and it shows in the numbers. In the fourth quarter of last year, the firm reported net yields of $1,279 per guest per night, up 11%. That compares with a yield of around $190 per night for Carnival cruise customers (the firms use different metrics to report these numbers, so they are not direct like-for-like comparisons).

Park your profits in the hotel industry

One of the most attractive segments of the industry is the hotel market. This is dominated by the likes of Marriott International (NYSE: MAR), Hilton Worldwide Holdings (NYSE: HLT), Hyatt Hotels Corporation (NYSE: H) and InterContinental Hotels Group (LSE: IHG). All of these companies have developed an asset-light, fee-driven business model in which they outsource hotel purchases to operators who manage the hotels under something akin to a franchise agreement. The financial results of this model have been outstanding. Over the past 15 years, Marriott has compounded at 15.7% per annum on a total-return basis. In 2025, Marriott reported revenue of just over $26 billion, with an operating margin of 15.8% and a return on capital invested – a measure of profit for every dollar invested in the business – of nearly 25%.

As the business required little capital investment to open new hotels, most of its operating cash flow was returned to shareholders. It generated $3.2 billion in operating cash flow and reinvested $1 billion into the business. It then returned $4 billion to investors through share buybacks and dividends, using debt to bridge the gap between cash flow and shareholder returns. That's been the approach for most of the past five years. Globally, the firm reported gross room additions of 100,000 units in 2025 and has a record pipeline of about 4,100 properties and nearly 610,000 rooms. The company is leaning into all-inclusive and ultra-luxury segments, targeting the high-spending cohorts of the market and the experience economy.

The same is true at Hyatt Hotels. The hotel group ended 2025 with comparable system-wide revenue per available room, (or RevPAR, a key hotel metric) growth of 4%. More importantly, all-inclusive resorts' RevPAR for packages was 8.3%, driven by strong demand. The firm is also leaning into the luxury and all-inclusive trends with the purchase of three Alua resorts for $140 million last year. It also bought Playa Hotels & Resorts in 2025, bringing 15 all-inclusive resorts across Jamaica, the Dominican Republic and Mexico to its all-inclusive portfolio. A few months later, it sold the portfolio to Tortuga Resorts, a real-estate and asset-management platform, for $2 billion, retaining a 50-year management agreement for 13 of the 15 resorts in the portfolio (as well as other incentives) as part of its asset-light structure.

IHG, one of the few London-listed players, is leaning into the growth of the middle class in emerging markets. In 2025, the group opened a record 443 hotels and added another 694 to its pipeline, including the highest-ever hotel openings and signings in Greater China. It has 6,900 open hotels and a further 2,300 in the pipeline, roughly a third of its existing estate.. Unsurprisingly, it's also leaning into luxury. Last year, it launched its Noted Collection, “curated for distinct points of view and cultural relevance”. This will sit alongside other IHG premium brands such as Vignette, Voco, Garner and Ruby, which launched last year.

Accor (Paris: AC), which owns 5,800 hotels, has long promoted luxury experiences for guests and this is now paying off handsomely. In 2025, RevPAR grew just 2.4% in constant currency terms at its mid-market brands, but its luxury and lifestyle division (around half the size) reported growth of 9.8%. Resort hotels remained a key contributor to growth, particularly in Turkey, Egypt and the United Arab Emirates, while its “Lifestyle Collective” hotels recorded record growth. Its brands recorded recurring growth in earnings before interest, taxes, depreciation, amortisation (Ebitda) of 20%.

Buy into the resort market

The other exciting segment of the market is the resort market, and I've saved the best until last. Vail Resorts (NYSE: MTN) and Compagnie des Alpes (Paris: CDA) are the US and European leaders respectively of the global skiing market. Vail is the largest ski resort operator in the world. It owns legendary spots such as Vail, Beaver Creek, Whistler Blackcomb and Park City, operated on multi-decade leases with some of the best skiing real estate in the world. What's attractive about both of these firms is their unique selling point – mountain leases. More importantly, they own the rights to restaurants, hotels and shops around the slopes. Vail has been able to capitalise on its position in the market among a core group of customers with its Epic Pass, which provides a stable income in what can be a cyclical industry. It has grown revenue from this pass at a 15% compound annual growth rate since its inception in 2008 to more than $1 billion.

The Epic Pass, like most other resort passes, is based on the one offered by Disney. The company that pioneered the theme parks we know today, the Walt Disney Company (NYSE: DIS) introduced the first park pass in the 1950s, with physical coupon books. These then became unlimited “passports” and then the FastPass system launched in 1999 to reduce waiting times, evolving into digital FastPass+ in 2014, and finally the paid “Lightning Lane” systems. Disney pioneered the theme park, but today, its theme-park business is buried within the Disney company, alongside a bunch of other not-so-attractive assets, such as the tough streaming business. Capital spending commitments of $60 billion to expand its cruise and parks offer could weigh on earnings for the foreseeable future.

Instead, investors should take a look at Japan's Oriental Land Co. (Tokyo: 4661). This company operates Tokyo Disney Resort, one of the most profitable theme-park operations globally. It also owns the exclusive licence for Disney intellectual property in Japan until 2076. Sales at theme parks and its hotels business recently hit all-time records, and it's planning to introduce more rides and flexible tickets over the coming years to capitalise on the experience economy.

Six Flags Entertainment (NYSE: FUN) is one of the largest theme-park operators in the US, but is struggling to return to growth due to operational issues. Following its merger with Cedar Fair and an attempt to go upmarket, coupled with a hike in ticket prices, attendance slumped by 13%. With a mountain of debt to deal with from the merger, Six Flags has resorted to cost-cutting, further alienating customers. It's a case study in what can go wrong in this market.

Other ways to invest in the leisure sector

Elsewhere, it could be worth looking at Banyan Tree (Singapore: B58), one of the world's leading independent, multi-brand hospitality groups centred on stewardship and wellbeing. It has a portfolio of 100 high-end hotels, resorts, spas, galleries, golf courses and residences, and last year revenue jumped more than 25% year on year, with core operating profit up 59%.

MGM Resorts International (NYSE: MGM), Las Vegas Sands (NYSE: LVS), Wynn Resorts (Nasdaq: WYNN) and Galaxy Entertainment (Hong Kong: 0027) are all players in the casino and luxury resort markets. Wynn is the leader at the luxury end of the market – indeed, the company calls itself the “world's only global luxury integrated resort developer and operator”. In its core Las Vegas market, Wynn's RevPAR is roughly 2.3 times the industry average and has grown 118% since 2019. Management is quite comfortable with its offering being the most expensive on the strip. The company has indicated a strategy of maintaining premium brand positioning and rates rather than granting discounts during weaker market periods. It's also been able to tie customers down with the Wynn Rewards loyalty scheme, which makes it less attractive for customers to switch brands. The system offers customers benefits if they stay and spend, encouraging repeat business.

Las Vegas is, however, no longer the group's largest market. That crown has recently gone to China's Macau, which is now roughly 15% bigger for the group in terms of earnings before interest, taxes, depreciation, amortisation and restructuring (Ebitdar). Wynn is also opening a new resort in the UAE, Wynn Al Margan Island, the region's first integrated resort, which could add $345 million of Ebitdar in Wynn's “base case” scenario (compared with $1.1 billion for Macau) or as much as $460 million in the “high case”. Wynn is currently spending heavily on capital projects, but it's still highly cash-generative and has retired 12% of its shares over the past three years through share buybacks. With the completion of Al Margan just around the corner, there's scope for cash flow and returns to jump in the coming years.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Korean beauty brands are all the rage right now and for investors it could be a glowing opportunity with the UK market projected to reach £14 billion by 2033.

Research firm Grand View Horizon says the market generated $9.2 billion (£7 billion) revenue in 2025, with skin and haircare products among the leading categories. It estimates a compound annual growth rate of 9.7% from 2026 to 2033, by which time the market is expected to be worth over $19 billion (approximately £14 billion).

With ingredients like PDRN (salmon sperm), snail mucin (the silver slime) and mugwort (an Asian weed), these products come with promises of glass-like skin, youth and hydration like no other.

And it’s taken off, with these products now in almost every store across the globe and flooding social media – a phenomenon known as ‘Hallyu’ or ‘Korean Wave’, referring to the Korean culture spreading to other cultures.

But it isn’t just confined to beauty, it's K-pop, K-food, K-fashion and K-movies, too. You may remember the widespread song ‘Gangnam Style’ by PSY in 2012, the early days of the Korean Wave.

Now, you see Korean marts like Oseyo popping up in popular locations around London and K-beauty scattered across high street beauty stores such as Boots, Sephora and Space NK.

“K-beauty is transitioning from a niche category into a scalable growth segment, supported by innovation, pricing, and cultural export. Globally, the segment is growing at around 10% compound annual growth rate, with the US now the largest demand centre and the UK still in early adoption,” Lale Akoner, global market analyst at eToro, said.

“Forecasts suggest K-beauty could capture a meaningful share of the UK market over the next decade as distribution expands across Boots, Superdrug, and online channels.”

While K-beauty users claim it does wonders to your skin and hair, could it do the same for your portfolio? Quite possibly - after all, lipstick stocks never quite go out of fashion and Korean skincare is a trend that is unlikely to go away. And while they do not form part of the top stocks and funds for DIY investors, this could change in months to come.

Here’s how you can get exposure to this explosive Korean skincare industry and the Korean Wave.

How to invest in K-beauty

Direct exposure for UK investors is limited, but there are some accessible options. Two stocks to consider, both listed on Korea Exchange and available via international brokers, are:

• Amorepacific (KRX:090430) - the South Korean company is behind some of the biggest Korean beauty brands like Laneige and Innisfree, seen in the UK’s top retailers.
• LG H&H (KRX:051900) - Previously called LG Household & Health Care, the company, a subsidiary of the LG Group, specialises in cosmetics and household products such as Dr Belmeur and Euthmyol.

However, these companies do come with higher volatility and China sensitivity, with China being South Korea's largest trading partner.

And we have already seen how volatile the Korean stock market can be when earlier this month, the fallout from the Middle East conflict forced the Korean stock market to implement a stock market circuit breaker, a temporary pause on trading.

L’Oréal brings in Korean skincare

Some more traditional routes can also provide you with exposure to K-beauty.

“A more stable route is through global beauty majors like L’Oréal (PA:OR) or Estée Lauder (NYSE:EL), which benefit from K-beauty trends via distribution and acquisitions. Retail platforms (such as Sephora) also capture upside as K-beauty drives customer traffic and basket size,” said Akoner.

L’Oréal entered the Korean skincare market following its acquisition of Gowoonsesang Cosmetics, including subsidiary Dr.G, from Swiss retail group Migros in December 2024.

Dr.G is a Korean skincare brand founded by dermatologist Dr Gun Young Ahn in 2003, headquartered in Seoul. L’Oréal said the brand is “positioned to meet the rising demand for K-beauty”.

LSE listed Unilever (LSE:ULVR) too has grown into K-Beauty with its acquisition of Carver Korea in 2017.

ETFs for K-beauty and other South Korean brands

As mentioned previously, Hallyu isn't just confined to Korean skincare and buying into an exchange-traded fund (ETF) or an actively-managed fund could give wider exposure to South Korean brands. These LSE listed Korea ETFs are worth considering:

• HSBC MSCI Korea UCITS ETF (LON:HKOR): Tracks the MSCI Korea Index.
• Franklin FTSE Korea UCITS ETF (LON:FLRK): Tracks the FTSE Korea 30/18 Capped Index, consisting of large and mid-cap Korean stocks.
• Barings Korea Trust: actively-managed fund investing in Korean stocks.

What’s clear is that the beauty industry is an attractive proposition with a steady demand as consumers seek out premium skincare, supported by an ageing population.

K-beauty is in the centre of this global growth, but the beauty sector as a whole is one to keep an eye on.

The view that utility companies are a safe haven for cautious investors is out of date. Today's market is far more active and complex than it was even five years ago. New regulations and a strong push from government to improve national resilience are driving this shift.

While headlines dwell on short-term political disputes, the bigger story is that the utility sector is being rebuilt. The drivers of this trend include a massive surge in demand for electricity driven by the digital economy, a regulatory overhaul of the water sector and a new partnership between private capital and the state with a view to lowering risk.

Utility companies come in two main flavours

You can divide the utility companies into two distinct groups. First are the companies that own and operate the heavy assets. They run the water pipes, electricity wires and pylons that keep the country functioning. Second are the service providers. These focus on data, billing and the technology that links the grid to the customer. Each group presents a different investment case.

The UK is at the start of a major, long-term infrastructure cycle and the work ahead is vast. The challenges range from meeting the energy demands of AI to modernising water networks. Both sides of the utilities sector are evolving in response and the market is recognising the growth potential of businesses once seen as dull.

Britain is currently overhauling its industrial strategy and utility companies have moved from the sidelines to the very centre of national-growth policy. For decades, investors treated the stocks in this sector as a set of bond proxies. The stocks were bought for their steady dividends and low volatility, but little else. A series of strategic shifts, driven by government policy, has changed that view.

The grid is the UK economy's main bottleneck

The first major shift is a crisis of capacity in our power networks. As John Pettigrew, the former chief executive of National Grid, has pointed out, the grid is becoming the main bottleneck for the economy. In 2023, he stated that the country needs to build seven times as much infrastructure in the next few years as it has in the past 30.

The problem is that the physical grid was not designed for the modern world. Engineers originally built most of this network to move power from large coal plants in the north down to the south. It was designed to serve houses and light up streets on a cold winter night. It cannot process the sudden, massive surge of electricity needed for the giant data centres that power the modern economy. This has created a backlog of projects waiting to be connected to the grid.

In 2026, the backlog of demand for data centres hit 50GW across 140 different sites. To put that number in perspective, the peak demand for electricity for the entire British grid is roughly 45GW. This means one single industry is now asking for more power than the entire nation uses on its coldest winter night when everyone is indoors using electricity. Global technology giants such as Amazon, Microsoft and Google are driving this demand. They have reclassified the UK as a primary growth zone, but they can't get the power they need because the old wires are at their breaking point.

National Grid has a multibillion-pound plan to reinforce the system. This includes building new substations and using advanced low-loss conductors. These technologies let the grid carry significantly more power without needing to put up entirely new pylons everywhere. This is a high-return path for growing assets because it avoids many of the planning headaches that come with new construction.

To handle the surge in demand, the government and the new National Energy System Operator have officially scrapped the old first-come, first-served model for grid connections. That old system let speculative projects sit on capacity for years, which stopped better-prepared data centres from getting online.

The new so-called Gate 2 reforms now prioritise projects based on how ready they are and how well they fit the national-energy plan. If a project misses its milestones, the operator immediately cancels its connection offer.

This allows National Grid to move from fixing things as they break to investing ahead of time and it can now justify building infrastructure before a data centre is even finished. This shortens the gap between spending money and earning a return, which is a clear win for shareholders.

The era of underinvestment in the water sector is over

A second major shift is happening in the water sector. The industry is moving away from a period of intense public and political tension. This was caused by years of underinvestment, resulting in frequent leakage and sewage spills that polluted rivers. The sector was essentially focusing on the short-term health of the pipes.

Adding to the pressure is the rise of AI; data centres do not just need electricity, they also require millions of gallons of water for cooling, making water companies a vital part of the tech infrastructure.

The 2026 White Paper, “A New Vision for Water”, is about making national infrastructure more resilient. The sector is starting a £104 billion investment programme for the five-year stretch that began in April 2025. This is nearly double what the companies spent in the previous five-year cycle. A single, integrated body that looks at both the environment and public health has replaced the previous fragmented oversight of Ofwat and the Environment Agency. This new regulator cares more about long-term results.

The Water Industry National Environment Programme is the main force behind this massive spending. It puts £24 billion specifically toward cutting sewage spills and cleaning up rivers. The programme requires companies to install thousands of monitors that track water quality around the clock. This ends the days when companies could essentially mark their own homework.

For investors, the focus has shifted from simple efficiency to whether these companies can actually finish such a mountain of work. The new rules introduce 25-year delivery plans to give pension funds the certainty they need by matching investment timelines to the long life of water pipes and plants.

Utility companies have a state-backed safety net

The third, and perhaps most important, shift is the emergence of a new partnership model between the state and utility companies. Historically, massive infrastructure projects were often considered too risky for private investors; if a project failed or stalled, the financial loss could be ruinous. To solve this, Great British Energy and the National Wealth Fund are now fully operational, reducing risk across the sector for investors.

With its £27.8 billion capital base, the National Wealth Fund has attracted more than £100 billion in private investment by offering debt guarantees and taking the first loss on higher-risk projects.

Essentially, the state acts as a buffer and makes projects safer for pension funds to back. This approach is especially valuable for emerging technologies such as long-duration energy storage and small nuclear reactors. Great British Energy also acts as a co-developer. It takes on the early risk of projects failing due to such things as environmental assessments. This leaves listed utilities free to focus on the high-margin work of building and running the assets. Because the state is now a partner in building core infrastructure, the investment risk to the whole system has dropped.

This state-backed safety net is also showing up in the retail energy market. The Great British Energy Local Power Plan provides cash for community energy projects that help keep the local grid in balance. This move toward decentralisation takes the weight off the distribution networks that the big utilities own. It lets these companies hold off on expensive physical upgrades and instead use digital tools to manage demand for power.

As more households pick up smart meters and tariffs that change based on the time of day, the whole system should work better. The shift to a data-heavy grid is turning the retail business into a high-margin tech platform. This change is a big reason why the outlook for the sector is better than it has been in years.

Key themes and plays for investors

The investment case for the listed companies is no longer just simply waiting for a dividend. It is about identifying which can most effectively turn this massive wave of state-backed capital into growing assets. For investors, the current market offers opportunities in companies that are becoming essential to the digital and green future of the country.

National Grid (LSE: NG) is the most obvious name to benefit from modernisation of the grid. As the sole owner of the transmission network across England and Wales, it is the physical gatekeeper of the emerging AI revolution. Under the RIIO-T3 regulatory framework that begins in April this year, the company has secured a real allowed return on equity of 6.12%. This is a decent improvement on the past, reflecting a need to attract more investment as well as the higher cost of funding the great grid upgrade.

Morgan Stanley recently pointed out that National Grid is moving away from being a low-growth utility and becoming a premium infrastructure investment. It highlighted that the company now has an asset growth target of 10% per year – well above the rate of inflation – and is heading toward earnings growth of 6%-8%. The firm is spending billions on 17 major projects to reinforce the north-to-south power corridors – essential for bringing power from offshore wind farms to the data-centre hubs.

The regulatory environment now allows for anticipatory investment. This means the firm can build ahead of demand. Doing so reduces the risk of stranded assets and ensures a steady stream of regulated income. As the asset base grows, the earnings potential of the company increases in a way that was not possible under previous rules. This shift from a yield-based valuation to a growth-based one is a key theme.

SSE (LSE: SSE) is another clear winner that has rebranded itself as a clean-energy champion. The firm is currently halfway through its ambitious investment plan, which involves spending £18 billion on offshore wind and transmission links. What makes SSE particularly interesting is how it has used the new state-utility partnership to lower its risk.

By working with Great British Energy, it can offload the early construction risks that used to weigh on its balance sheet, allowing it to maintain a strong credit rating while still pursuing aggressive expansion.

The partnership with the National Wealth Fund is also providing SSE with first-loss guarantees on complex projects. This is a significant advantage because it protects SSE from the cost overruns that often plague large infrastructure projects, lowering the overall cost of borrowing and raising returns for shareholders.

One could argue that SSE should be viewed as a high-quality infrastructure asset rather than a riskier power generator. This new reality hasn't escaped market attention – the shares have risen by 60% in just the last six months.

The winners in water and retail

In the water sector, the winners will be those who can navigate the new £104bn investment cycle. Severn Trent (LSE: SVT) and United Utilities (LSE: UU) are now working within a regulatory framework that puts long-term resilience ahead of short-term savings. This creates the potential for a large expansion in their regulated capital value, which is the base used to calculate their profits.

Severn Trent has already shown strong revenue growth following the latest tariff reset. The company is using a modular design for its assets, which helps keep construction costs low and delivery speeds high. This operational efficiency is a key driver of value.

United Utilities is also performing well, with a focus on its multi-billion-pound programme to reduce storm-overflow spills. Both companies are likely to benefit from outperformance payments if they hit their new environmental targets.

These companies offer a rare combination of inflation-linked returns and the security of a state-mandated investment cycle. The move to 25-year delivery plans provides the long-term visibility that institutional investors crave.

Centrica (LSE: CNA) and Telecom Plus (LSE: TEP) represent the technology-based, consumer-facing end of the sector. These companies do not own the heavy wires or pipes, rather the data and relationship with customers.

Centrica has moved far beyond its origins as a gas supplier. It is now a leader in flexible energy services, using smart data to help businesses and homes use power when it is cheapest. This capital-light model allows for high margins and strong cash flow without the debt burdens seen elsewhere in the industry. The company has a strong balance sheet and has been returning a lot back to shareholders through buybacks and dividends. Its move to a service-based model exposes it more to the economic cycle, but also provides the possibility of decent returns.

Telecom Plus, better known to consumers as Utility Warehouse, uses a similar approach by bundling energy with other home services. Its ability to use smart-meter data to lower wholesale costs has contributed to its higher levels of growth over the years.

By helping customers balance their own energy needs, it reduces the overall strain on the grid. This creates a win-win situation where the company earns higher margins and the customer pays lower bills. The scalability of this digital model is a significant advantage in a world where physical infrastructure is expensive and slow to build.

The heavy infrastructure is expensive and slow to build. The heavy infrastructure companies that form the core of this sector were stuck in a bit of a rut for a long time.

Over the last year or so, however, a clearer lead from the regulators has really lit a fire under their share prices. Because of that, most of the easy money has already been made, with some share prices rising by more than 50% in just a few months.

Still, we now have long investment horizons thanks to government policy. Patient investors who are happy to sit on these shares for years should see good rewards for the level of risk they are taking on.

National Grid is right at the front of this modernisation. It has gone from being a slow utility to becoming a much faster infrastructure business. It is never going to be a high-speed tech stock.

Nevertheless, its better growth outlook, along with those reliable dividends, offers a level of security that makes it one of the lower-risk stocks on the FTSE. It remains a vital part of Britain's energy future. For investors who wish to build a diverse portfolio of long-term, high-quality businesses, National Grid has a lot going for it.

The two big water companies, Severn Trent and United Utilities, have their own specific hurdles and opportunities to deal with. Both are updating their systems to meet new standards for clean water and service. They are getting a direct boost from the massive building phase the country is going through right now.

For investors looking for income, these are high-quality assets. They offer returns linked to inflation and benefit from a regulatory set-up that is far more predictable than the mess we saw in the early 2020s. There has always been little to choose from between the two as they tend to perform very similarly.

At the other end of the sector, Centrica and Telecom Plus offer a different mix of risks and rewards. These businesses depend much more on how good the management is and how the wider economy is doing. They also have to fight harder for customers in the retail market. However, they don't have to own all the heavy kit themselves.

This capital-light approach has let them keep up very high returns for shareholders through both buybacks and dividends. Telecom Plus, in particular, has shown it can grow even when things get tough by bundling home services into one efficient package.

Forced evolution brings opportunity

The utilities sector is entering a period of forced evolution. By clearing the infrastructure bottlenecks and establishing a clear partnership with the state, the industry is transitioning from being a defensive shelter to becoming a central pillar of national growth. For the patient investor, these companies offer a rare blend of stability and compounding growth, underpinned by the structural demands of the 21st-century economy.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Soft-drinks maker AG Barr can trace its roots to 1875, when founder Robert Barr started producing and selling aerated waters from a small factory in Falkirk. “Iron Brew” was launched in 1901 and grew steadily over the next few decades. After World War II, the product was renamed Irn-Bru due to labelling regulations, and in the 1950s, the company started to expand into England. For most of its history, the company has been associated with just one drink, but that changed in the mid-2000s. In 2007, it became the exclusive manufacturer and distributor of Rockstar Energy drinks in the UK and Ireland (this deal ended in 2020). Then, in August 2008, the group acquired Rubicon Drinks, a specialist in exotic fruit-based soft drinks, for £59.8 million. In 2015, AG Barr entered into a ten-year agreement with the Dr Pepper Snapple Group (now called Keurig Dr Pepper) to distribute the Snapple brand in the UK and other UK territories. This deal was quickly followed by the acquisition of Funkin Cocktails the same year.

AG Barr is one of the best examples in the UK of a business that's been able to turn relatively abundant and simple raw materials – sugar and water – into a cult-like product. Thanks to the low cost of its ingredients and the power of its brand, it has consistently earned high profit margins and generated piles of cash year after year. Its return on invested capital (ROIC), a measure of profitability, is consistently above 20%, implying AG Barr can double every £1 invested in its operations within three and a half years. The five-year average for Unilever and AstraZeneca, two of the largest businesses in the FTSE 100, is 15.5% and 10%, respectively.

Over the past six years, to July 2025, AG Barr has generated a free cash flow of £230 million, about a third of its current market capitalisation, with the cash used for acquisitions and shareholder returns. The latest set of deals includes Fentimans, the soft drinks and mixers brand known for its “Botanical Brewing” process, and Frobishers Juices, the premium natural fruit juices and soft-drinks brand, both bought for £51 million.

This combination of cash generation, deals and shareholder returns has helped AG Barr outperform the market with a total return of 13.2% over the past five years (assuming the valuation remained flat at around 18.9 times forward earnings), compared to 12.8% for the FTSE All-Share index. Compared with the likes of Coca-Cola, PepsiCo and Monster, AG Barr is a tiny player. Still, its story is a case study of the lucrative nature of the soft-drinks industry.

How soft-drinks brand Coca-Cola went global

Coca-Cola is the world's most recognisable soft-drinks brand. Invented in the late 1880s (it's about the same age as Irn-Bru), it was originally sold as a syrup to pharmacies for $1.30 a gallon, mixed with carbonated water and sold to customers for five cents a glass, or $6.40 a gallon. Coke carved out a niche in the market due to its low production costs and high margins for its pharmacy partners. The company's real breakthrough came 13 years after its first pharmacy sale when two lawyers from Chattanooga, Joseph Whitehead and Benjamin Thomas, convinced it to give them the rights to bottle the drink. The resulting agreement helped catapult Coca-Cola into the hands of millions of consumers, who could suddenly buy Coke nationwide.

Coca-Cola originally contained cocaine derived from the coca leaf, along with caffeine from the kola nut, which goes some way towards explaining why the general public found the drink so addictive. The company began reducing the cocaine content around 1903 and had removed it from the formula by about 1912, but by that point Coke had firmly established itself in the minds of American consumers. (Coca-Cola still uses de-cocainised (cocaine-free) coca leaf extract. Dried leaves are imported from Peru and Bolivia by Stepan Company in New Jersey, the only authorised US importer of coca leaves, especially for Coca-Cola.)

In 1915, the Coca-Cola Bottling Association voted to spend $500 to develop a distinctive bottle for the drink – a “bottle so distinct that you would recognise it by feel in the dark, or lying broken on the ground”. This gave rise to the company's characteristic bottle, known around the world today, and further accelerated the group's growth. By 1920, more than 1,200 Coca-Cola bottling operations had been established, all of which earned healthy profit margins on the spread between purchasing syrup from Coca-Cola and selling bottles to customers.

Why Warren Buffett loves Coke

Coca-Cola's edge has always been its syrup. The company has in the past flirted with the idea of bottling its own drinks, but it has always returned to the same model of producing and distributing syrup rather than the capital-intensive, costly business of bottling products. By avoiding this pricey and capital-intensive business, it has been able to redirect profit back into growth, mainly through marketing. This is the real secret of the soft-drinks business. Turning water and sugar into a drink isn't difficult. The real challenge is getting consumers to buy your product.

US investor Warren Buffett often uses Coke to explain his concept of a “moat” – a competitive advantage that no amount of money can buy. As he once said, “If you gave me $100 billion and said take away the soft drink leadership of Coca-Cola in the world, I'd give it back to you and say it can't be done”. It was this logic that led him to invest $1.3 billion in Coke in the late 1980s. Today, the stake is worth around $30 billion and the trade is often cited as a case study in the perfect investment. Thanks to its advantage, Coke has significant pricing power. It can raise prices year after year, even if it's only a penny at a time, and still retain its customer base – it's been doing just that for more than a century.

Coke pioneered this model, but today it is energy drinks that exemplify it perhaps more than any other segment of the soft-drinks market. Monster Beverage, for example, has returned nearly 200,000% over the past 30 years for investors and the company has achieved an average ROIC of 23% over the last five years, with the figure rising to 31.6% in 2025 when fourth-quarter sales hit a record $2 billion. Even at the five-year low of 18.4%, that was still far above Coke's 15.9% and PepsiCo's 17.4%. The company uses a similar asset-light model to Coke's. It outsources most manufacturing and focuses on the core product. At one point, Coke even looked at buying the business to break into the energy-drink market; in 2014 it settled for a 16.7% equity stake worth $2.15 billion. Coke also handed over its energy-drink portfolio.

Monster and its leading peer, Red Bull, both spend heavily on marketing. Monster consistently spends roughly 10%-11% of its total net sales on selling and marketing, with a focus on event sponsorships, athlete endorsements (extreme sports/racing), and in-store cooler placements. Red Bull doesn't disclose what it spends as a private company, but it's estimated to be around 20%-30% of sales, which includes the company's F1, football, ice hockey and e-sports teams.

What's particularly interesting about the energy and soft drink market is the intensity of customers' loyalty to the brand. About 60% of consumers prefer to stick with a familiar brand, underscoring the industry's barriers to entry. That being said, there's room for innovative brands to grab some share of the market, especially when they're backed by substantial marketing power. Thirty-nine per cent of consumers aged 25-34 prioritise “unique and innovative flavours” over a brand's name, a shift that's been attributed to the increase in demand in 2025 for Dr Pepper over Pepsi.

Forty-four per cent of young people cite sugar content as their primary concern. Brands that successfully transitioned to “zero-sugar” products (such as Coke Zero or Monster Ultra) have retained their loyalty. Meanwhile, the launch of brands such as Prime Energy, co-founded by social-media celebrities Logan Paul and “KSI”, demonstrates the powerful influence of social-media figures and of consumers' desire to “be part of something bigger”.

New fronts in the Pepsi wars

Competitors have been nipping at the heels of Coke and Pepsi since their very foundation and now there are some visible signs that Coke's $100 billion advantage, to quote Buffett, is starting to wane. After Coke won the Pepsi wars in the 1980s, for nearly 40 years Coca-Cola was the number-one, and Pepsi the number-two, soft drink brand in the US. However, in 2024 Dr Pepper officially tied with (and, by some metrics, surpassed) Pepsi to become the number-two carbonated soft drink brand in the US. In 2000 Pepsi held a 13.5% market share, while Dr Pepper had just 6.3%. Today, those figures stand at about 8.3%. Last year, Dr Pepper's US beverage arm reported revenue growth of nearly 12%, eclipsing that of its larger peers.

This reflects a broader shift in the market. In 1995, Coke and Pepsi together controlled nearly 75% of the US soft-drinks market, while today that share is around 40%. Both firms have had to buy and build new brands to maintain their market share. The Coca-Cola Company actually owns three of the top five brands in America, including Coca-Cola Classic, Sprite and Diet Coke, and 65% of its revenue today comes from outside the US. Overall, 3% of beverages consumed every single day are Coca-Cola products.

PepsiCo, meanwhile, has expanded beyond soft drinks, a shift that's been attributed to its loss of market share. Its sports-drinks and snacks arm now provides the bulk of PepsiCo's profit, with Frito-Lay – which owns brands such as Lay's (Walkers), Doritos and Cheetos – accounting for around a third of revenue and just under half of operating profit. Dr Pepper, on the other hand, has doubled down on its core while leaning into viral media plays. It has exploited “limited time offer” (LTO) deals, with hits such as Creamy Coconut (which went viral on TikTok in 2024 and 2025) and the Dirty Soda trend (mixing soda with cream/lime) turning Dr Pepper into a social-media “lifestyle” brand. It's also been in the right place at the right time as generation Z and millennials have turned to “spicy” or “bold” flavours.

Then there's the so-called “third-button advantage”. Until recently, Dr Pepper was not considered a competitor to Coke or Pepsi, so it was usually available along with these products at drinks dispensers on the so-called “third button”. As bottlers usually produce more than one brand, with some producing Coke and Dr Pepper or Pepsi and Dr Pepper, this makes a lot of sense for all parties involved. What's more, in establishments that had unique agreements with either Coke or Pepsi and as a result only had one or the other, Dr Pepper sat happily alongside both. As well as its distinctive flavour profile, Dr Pepper's unique selling point became its availability.

Whether this competitive advantage will continue remains to be seen. Dr Pepper Snapple has exploited its popularity to go on the hunt for acquisitions. It has bought JDE Peet's (coffee) and Ghost Energy, which it acquired to compete in the high-growth energy-drinks sector. The deals will help raise the company's top line by about two-thirds, but could take attention and resources away from the core brands.

Some soft-drinks brands are losing focus

If there's one thing Monster Energy does better than any other company in the soft-drinks industry, it's focus. The company has some brands outside of its strategic and core Monster Energy segment, but these account for only around 10% of sales (most came into the business via the Coke deal). The company is incredibly profitable and cash generative, with a gross profit margin of 55.8% for 2025 on $8.3 billion of revenue, net income of around $1.9 billion and a near-100% free cash conversion ratio. But management has historically preferred to return this cash to investors or market the brand rather than buy up new businesses. The company ended 2025 with nearly $2.8 billion in cash and short-term investments and no debt.

Over the past 15 years, this focus has translated into a 21.2% annual total return for investors, compared with 8.2% for Coke, 8.8% for Pepsi and 10% for Keurig Dr Pepper. Revenue growth tells the whole story. Over the past five years, Monster's revenue has increased 51% compared with 24% for Coke, 18% for Pepsi and 31% for Dr Pepper.

More worrying is the overreliance on prices to drive this growth. Since 2021, Coke has shifted from trying to sell the most product to trying to make the most profit per ounce. To do that it's hiked prices and reduced the size of packaging, helping the bottom line (net income has risen from $9.5 billion in 2022 to $13.1 billion in 2025), but it is really testing consumers' loyalty. Prices rose 6% in 2021, 11% in 2022, 10% in 2023 and 8% in 2024. However, volume rose just 8% in 2021, 5% in 2022, 2% in 2023, flatlined in 2024 and was on track to decline in 2025. That was stopped after Coca-Cola's chief executive, James Quincey, admitted that the “pricing lever” had been pulled as far as it could go.

Pepsi, too, has had to pull back on pricing. After years of price hikes (in 2024, French supermarket giant Carrefour famously said it would stop stocking PepsiCo products “due to unacceptable price increases”) it has announced price cuts of up to 15%

In both cases, these companies seem to have fallen into the classic Wall Street trap of financial engineering to drive returns while ignoring what really matters: the consumer. All three of the top giants are spending billions of dollars on debt interest, share buybacks and dividends, as topline growth has wilted. Coke has $46 billion of debt, Pepsi has nearly $50 billion and Keurig has nearly $16 billion.

These companies might have lost their way, but there is no denying their core soft drink businesses remain tremendously profitable. Rather than looking at the big companies, investors should focus on the smaller players – those with strong balance sheets, room for further acquisitions or cash returns, and businesses that can still fight for market share and drive growth through both the top and bottom lines, as well as drive volume growth.

The best soft-drinks stocks to buy now

In the UK, AG Barr (LSE: BAG) is the top pick. According to Panmure Liberum, the stock is trading at a fiscal 2026 price-to-earnings (p/e) ratio of 14 with a yield of 3.1 and a free cash flow yield of 6%. Even after recent deals, analysts believe the company will end the year with net cash of £53 million, excluding leases, around 7% of its market capitalisation.

Monster Energy (Nasdaq: MNST) shows no signs of slowing down over the coming years, with analysts at UBS predicting 11% revenue growth for 2026 and high single-digit annual revenue growth until the end of the decade. Economies of scale should help the company's net margin rise from 23.7% to 27.7% over the same period and, considering Monster's record of capital allocation, most of this additional income should flow back to investors. UBS has the shares trading at a forward p/e of 38.6 or 26.2 for 2030, compared with the five-year average of around 40.

Keurig Dr Pepper (Nasdaq: KDP) is worth watching. If the company can execute its latest transactions successfully while still growing the underlying business, it does look cheap compared with its growth potential. UBS has the company trading at a free cash-flow yield of 7.8% on a forward (fiscal 2026) basis and a p/e of 13.6, with a yield of 3.2%. In 2022, the stock traded at a p/e of 22.3, so there's room for a re-rating if the company can convince the market it's heading in the right direction. On debt, UBS believes Dr Pepper can take net debt down to $5.6 billion by 2029. If management can meet this target, further deals and shareholder returns could be on the cards.

One play that really leans into the low-calorie trend is Celsius Holdings (Nasdaq: CELH), which produces the premium, lifestyle energy drink CELSIUS – marketed as the zero-sugar alternative to traditional energy drinks. The company is in growth mode, with revenue jumping from $1.4 billion to $2.5 billion last year, while net income nearly doubled to $390 million. At the beginning of last year, the group acquired Alani Nutrition for $1.8 billion, another energy-drink and snack firm, and in the last year, sales here have doubled. Celsius has no debt and analysts have pencilled in a near doubling of revenue growth by the end of the decade (although based on recent growth, that's conservative). The shares are trading at a 2026 forward p/e of 32.7 and a free cash-flow yield of 3.4%.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

The leisure sector is but part of the gigantic services sector, which accounts for roughly 80% of UK GDP. The latter encompasses everything from professional services such as solicitors and accountants, to restaurants and coffee shops, banks and everything in between. As a result, the entire sector is connected to the consumer in one way or another. Whether it’s the waiter in the restaurant, or the highly-paid accountant that works for a US investment bank who buys a £15 lunch every day, the services sector, the consumer and leisure spending all go hand in hand. To put a number on it, consumer spending accounts for about 60% of UK national output, with the bulk of this generally described as non-discretionary spending on items such as food and drink.

Around 10% of the UK’s workforce is employed in what you could call the “discretionary” leisure sector, which encompasses businesses such as pubs and restaurants, hotels, travel-related firms, gyms and other similar businesses. A large segment is the travel sector, which, according to government figures, is worth around £70 billion a year, split roughly in half between domestic travellers and international visitors.

Challenging years for the UK leisure sector

The past year and a half has been a tough time for the UK leisure sector. It is highly dependent on the health of the consumer, both financially and in terms of confidence. Most data and surveys show they are becoming more cautious with their money, so they’re prioritising non-discretionary spending. Consumer spending tends to rise when consumers perceive their discretionary income to be increasing. When consumers perceive that to be declining, they stop spending, and that’s bad news for the leisure sector.

The latest data from Barclays on consumer card spending shows that it fell 1.1% year on year in November – the largest fall since February 2021. A survey from the British Retail Consortium trade body showed spending at big retailers rose by 1.4% in annual terms in November, the slowest growth since May. Consumer spending on leisure was relatively stable in the run-up to the pandemic, before dropping off a cliff in the first quarter of 2020, according to Deloitte. Sentiment and spending bounced back in 2021, but since May 2020, consumers have remained cautious due to rising prices, stagnant wages and political uncertainty. Analysts expect this trend to continue. According to the Office for Budget Responsibility and the Institute for Fiscal Studies, consumer discretionary income is expected to rise by just £100 a year, or thereabouts, until the end of the decade.

As spending has stagnated, costs have continued to rise. Energy, tax and wage costs have all risen substantially over the past three years, and it doesn’t look as if that is going to come to an end any time soon. In the Autumn Budget, the chancellor announced the national living wage would rise by 4.1% in April to £12.70 per hour, while the hourly national minimum wage would rise by 8.5% to £10.85. This followed a near 10% increase in the national living wage for workers over the age of 21 in 2024, which, when combined with the increase in employers’ national insurance, sent the cost of labour skyrocketing in the labour-intensive service sector.

Changes to business rates announced in the Autumn Budget are also going to increase the tax burden on businesses next year. The government claims it is keeping the increases down for the hospitality sector by phasing in the changes over three years, but the UK Hospitality trade body estimates that an average pub will pay £12,900 more over the next three years, while an average hotel will pay £205,200 more. Days after the Budget, Whitbread, the owner of the Premier Inn chain, said the changes would push costs higher across the business by 7% to 8%, giving investors some idea of what’s in store for the sector next year.

With these headwinds buffeting the sector, it’s no surprise that equities in the sector have fallen by an average of 1.6% year to date compared with a 7.6% return for the FTSE All-Share index. However, despite the doom and gloom, on an underlying basis, companies seem to be managing. Trading has held up and margins have improved thanks to operational efficiencies and the implementation of new technologies. As a result, the sector is cheaper than it was at the beginning of the year, trading at an enterprise value to Ebitda ratio of 6.4 times, compared with 7.4 times at the start of the year, and a p/e ratio of 11.8 times compared with 13.5 times, according to Panmure Liberum. There’s also growing evidence that consumers are in a far better position to spend as we head into the new year.

Consumers seem to be spending regardless

The average UK consumer, while not spending as much as the leisure sector would like, has a strong balance sheet. The percentage of disposable income that’s not spent on consumption (ie, is saved) rose to 10.7% in the second quarter, above the three-year pre-pandemic average of 5.6%, according to the Office for National Statistics. So consumers have money to spend if they want to spend it. There’s also been a shift in how consumers want to spend their money over the past three years, as the world has bounced back from Covid.

Consumers want to spend money on experiences, and are more than happy to pay for a one-off, unique experience that they can’t replicate. They also appear to be more willing to spend on big-ticket events and experiences. According to the YouGov GB Dining Out Report in October, 38% are eating out less than they did a year ago. Even for higher-income diners, that number is 29%. But a recent report by Bloomberg cited examples such as Hawksmoor and Gordon Ramsay restaurants, as well as high-end Michelin-star restaurants, that are recording bookings far in excess of last year’s figures, in some cases by as much as 30%.

And reading through the recent trading statements of companies in the sector, it’s clear consumers are spending more when they do put their hands in their pockets. Mitchells & Butlers (LSE: MAB), JD Wetherspoon (LSE: JDW), Fuller’s (LSE: FSTA) and Young’s (LSE: YNGA) have reported like-for-like sales growth of 3.8%, 3.7%, 4.6%, and 4.2% respectively in the run-up to Christmas – all ahead of the market. Young’s and Fuller’s are particularly notable, as they are more of a premium offering than the rest of the market.

Then there’s the data from travel company On the Beach (LSE: OTB). Alongside its results for the year to the end of September 2025, it said it expected a record summer in 2026, with 8% year-on-year growth, following 11% growth in 2025. Winter 2025 forward bookings were up 15%, it said, with four- and five-star holidays now accounting for 80% of the total. EasyJet (LSE: EZJ) has reported that 80% of its bookings are sold for 2026, with prices up by double-digits. It expects a 15% rise in customer numbers in 2026.

Everyman Media Group (LSE: EMAN), the operator of luxury cinemas, has said that while the UK box office has been “weaker than expected” in the fourth quarter, it has seen increased spending per head among customers visiting its venues. For the 26 weeks ended 3 July 2025, ticket prices and food and drink spending per head rose around 6% year on year.

Next (LSE: NXT), often considered the bellwether of the UK retail sector, has smashed its own expectations for growth this year. Over the 13 weeks to 25 October, full-price sales were up 10.5%, ahead of guidance of 4.5%. International growth helped, but full-price sales in UK stores rose by 4.3% and online sales by 8.7%. There’s even data showing that consumers are willing to pay more for everyday essentials. According to Which magazine, Ocado (LSE: OCDO), one of the most expensive supermarkets, ended its half-year to the beginning of June as the UK’s fastest-growing grocer over the previous 12 consecutive months. Revenue rose 16.3%, ahead of the market, as order volume per week jumped 14.7% and the average value of a basket of goods grew by 0.7% to £124.19.

Investors cannot ignore the cold, hard sales figures on the ground. All of these companies are recording robust growth that runs counter to the overarching narrative presented by surveys and the media. This suggests that some of the doom and gloom on the UK leisure sector is sentiment- and confidence-driven rather than an accurate reflection of spending patterns. Now could be the time for investors to leap in.

Leisure stocks are going cheap

The good news for investors is that some of the most attractive leisure stocks are currently trading at deeply discounted multiples, most likely a reflection of the poor sentiment towards the sector and consumer spending. This means there’s already a strong margin of safety baked into the names, limiting the downside if the environment is worse than trading updates suggest.

Marston’s (LSE: MARS) is one company that stands out in particular. Trading on a forward p/e multiple of seven for 2025, falling to 6.4 for 2026, you would think the company is struggling, both in terms of growth and financial sustainability. However, it recorded a 71.3% increase in profit before tax in its latest preliminary results. Sales increased 1.6% on a like-for-like basis, and its Ebitda margin expanded 140 basis points. Over the past two years, the company has seen a substantial decrease in net debt and interest costs as a result, with borrowing now down at 4.6 times Ebitda compared with management’s target of four. Free cash flow is in the region of £50 million, putting shareholder returns firmly on the radar for the first time in recent memory. The pubs and bars group is expected to report its Christmas trading in January 2026, but it has already said that Christmas bookings were up 11% on last year’s levels at the end of November. This is one stock that could see a substantial re-rating if the market comes to appreciate its turnaround story, valuation and growth potential.

Profiting from salad

Self-help initiatives always help unlock value for shareholders and catalyse a re-rating of undervalued equities. SSP Group (LSE: SSPG) sits on the edge of the UK leisure sector with a large international business, but is worth considering, with multiple levers to unlock value. The group, which owns brands such as Upper Crust and franchises including M&S and Burger King, runs concessions mainly at travel hubs worldwide – it’s the world’s second-largest operator in the space. SSP’s latest trading update recorded revenue growth of 6%, with especially strong performance in North America and weakness in continental Europe. Management has commissioned several strategic reviews of the portfolio recently, including a review of its Continental European Rail, a perennial underperformer. The group also holds a 50.1% stake in an Indian joint venture, Travel Food Services.

The latter listed in India last year and is trading at a higher valuation than its parent company K Hospitality. With Indian listing rules requiring a 25% free float in three years from listing (it listed with a 13.8% free float), SSP could sell some of its stake over the coming years, unlocking cash for investors. The sale of the firm’s underperforming businesses, as well as unlocking cash from Travel Food, are both potential catalysts for the stock, currently trading at a forward p/e of just 12.4. That’s also relatively cheap for a company that generates a pre-tax return on capital employed – a measure of profit for every £1 invested in the business – of 18.7%.

At the smaller end of the spectrum, Tortilla Mexican Grill (LSE: MEX) is worth a look. The company has a market capitalisation of just £16 million, so it’s probably not suitable for every investor, but it’s the fastest-growing business in the UK casual dining and leisure sector. The company recorded like-for-like sales growth of 7% in its latest trading update, more than double the market average, and it’s moving rapidly towards sustainable profitability as its store roll-out continues. The company, which creates “freshly made, award-winning California-style Mexican burritos and tacos”, has been leaning into the demand from UK consumers for healthy fast food. It launched a new menu, including items such as salad and protein pots, over the summer, and demand has been brisk, with salad volumes up 133% and protein-pot sales hitting £100,000 in the first eight weeks. Other new menu items are planned, as well as expansion into new markets. It’s rolling out new kiosks and has launched a franchising initiative with SSP.

However, it is struggling to digest its French business, Fresh Burritos, acquired in July 2024 for €3.9 million. An overhaul of the acquired brands is running behind schedule, and costs are growing, but it has given Tortilla a platform for growth within Europe. As these costs tail off, Panmure Liberum expects the business to earn its first profit of £1.6 million next year, rising to £4 million in 2027 as store openings continue. That would put the shares on a forward p/e of just five, dirt cheap for a company earning a return on capital employed (Roce) of 24% on its established UK arm.

On the Beach (LSE: OTB) is another operator with plenty of levers to pull to drive growth. As noted, holiday bookings are tracking much higher year-on-year, with consumers increasingly prepared to spend more. The company is also launching into new markets such as the Republic of Ireland, together with city breaks and cruises, to help complement its core beach-holiday arm (92% of business currently). The new city-breaks arm contributed 2% of the overall group’s 11% increase in total transaction value in fiscal 2025, highlighting the demand in this market. On the Beach’s cruise business is too new to judge at this stage, but this is a tried-and-tested market where the firm should be able to leverage its existing brand recognition to win further wallet share with existing customers. Analysts at Berenberg expect the company’s sales to rise 14% in 2026 and then 16% in 2027, driven by these initiatives and increasing customer spending. At the same time, they’ve pencilled in Ebit margin expansion from 24.7% in 2025 to 27.7%. Put all of the above together and the bank has pencilled in a p/e of 10.1 for fiscal 2026 and 8.1 for fiscal 2027.

Leveraging AI

Hostelworld Group (LSE: HSW) is a tech company masquerading as a leisure stock and is the world’s leading hostel-focused online booking platform. After building a solid growth platform over the past five years, the company is now midway through a plan to boost its exposure to customers earlier in the planning phase of their trips, leaning into the growing demand for experiences when travelling.

To that end, it recently acquired OccasionGenius, a US-based business-to-business event discovery platform. The platform leverages AI and technology, augmented with a human oversight layer, to aggregate resources, including national ticketing sites such as Eventbrite, Ticketmaster and thousands of “micro” sources, including local calendar sites and social media, to create marketing-ready content for its customers (such as hotels, dating apps and airlines).

Hostelworld has laid out plans to double OccasionGenius’s exposure, although it’s not expected to contribute meaningfully to the group’s bottom line in the near term. Expansion, plus increased booking demand, is expected to send sales up from £95 million to £118 million by 2027 and Ebit from £15.3 million to £22.5 million. However, what’s really notable is the group’s cash generation. The group is expected to move from a net debt to a net cash position of £21.4 million by 2027, compared with its current market value of £155 million. As such, on a net cash basis, the stock is trading at a sub-ten forward p/e ratio.

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“The true investor… will do better if he forgets about the stock market and pays attention to his dividend returns.” – Benjamin Graham

Dividend income has always been one of the key contributors to equity-market returns, especially in periods of volatility or bear markets. In the 1970s and 2000s, both periods of significant market volatility for the S&P 500, virtually all of the index’s returns came from income, according to data compiled by Bloomberg and Guinness Global Investors. In the 1970s, the index recorded growth of 76.9%, with 17.2 points coming from price appreciation and 59.7 from dividend income. In the 2000s, the index fell by 24.1%, but dividends added 15 points for a total return of -9.1%.

The longer one stays invested, the more critical dividends become. Guinness Global’s data, going back to 1940, reveal that, over rolling one-year periods, the total contribution from dividend income to total return was just 27%, but that number grew to 57% over a rolling 20-year period. They also reveal that $100 invested at the end of 1940, with dividends reinvested, would have been worth approximately $525,000 at the end of 2019, versus $30,000 with dividends paid out. In this period, dividends and dividend reinvestments accounted for 94% of the index’s total return.

The same trend has been observed in the UK. Between 1 January 2000 and 31 December 2019, the FTSE 100 delivered an average annual return of just 0.4%. However, if you include dividends, the index has actually returned 122% over the same period (or 4% a year), according to Schroders’ calculations.

Headwinds for dividend stocks during the pandemic

Still, there’s a reason the figures presented only go up until 2019. Since the pandemic, this relationship has broken down. The latest data from S&P Global show that, since 1926, dividends have contributed about 31% of the total return for the S&P 500, while capital appreciation has contributed 69%. That’s mostly down to the performance of the past five years.

Since the end of 2021, dividend stocks, as defined by the S&P 500 Dividend Aristocrats index – S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years – have produced a total return of just 9% a year compared with 15.6% for the broader S&P 500 index. This decade, dividends have added just 12% to the S&P 500’s total return, the lowest contribution on record, says Hartford Funds.

As Ian Lance, co-manager at the Redwheel and Temple Bar Investment Trust, notes, equity returns have been “driven by a positive re-rating of equities, particularly in the US and particularly in technology stocks”. Dividend stocks were also hit disproportionately hard in the pandemic years. During 2020, $220 billion of dividends were either cut or paused, according to Janus Henderson.

Research by Goldman Sachs found that more than 80% of US dividend exchange-traded funds (ETFs) underperformed the S&P 500 during the 2020 equity drawdown period, and half of them did not bounce back as strongly as the index in the subsequent recovery.

Dividend stocks also “tend not to perform well when interest rates rise”, as Alan Ray, investment trust research analyst at Kepler Partners, notes. “Investors drawn to conservatively managed dividend-paying companies when interest rates were close to zero now find they can buy ‘risk-free’ UK gilts with yields of 4% or 5%, or even just keep cash in a savings account,” says Ray.

When to trust the dividend yield

Despite the headwinds for dividend stocks over the past five years, history shows they can be a safe haven in periods of volatility and uncertainty. What’s more, many income stocks are now trading at relatively undemanding valuations compared with their growth peers, suggesting there’s a bigger margin of safety with these equities in the event of a market downturn.

There’s no official definition of what makes a good income stock, but there’s one thing most of the research on the topic agrees on, and that’s a correlation between yield and quality, or rather the lack of it. While a dividend stock with a high yield might seem attractive as an income play, more often than not the yield is a reflection of traders’ doubt about the sustainability of the payout.

As Martin Connaghan, co-manager of Murray International Trust, notes, “there is no point in being drawn in by a high dividend yield… because that yield is most likely unsustainable and hence false. Stocks that have, on the face of it, very high yields can be vicious value traps if dividends are subsequently cut.”

In fact, research shows that, rather than chasing high yields, investors should instead look to companies offering yields around the 2% to 4% mark. Yield itself should not be used as a gauge of quality. The best way of evaluating the sustainability and quality of a dividend payout is to analyse the quality of cash flows. In business, cash is king. Cash flow gives a good indication of management’s approach to capital allocation.

As Imran Sattar, portfolio manager of the Edinburgh Investment Trust, notes, “For stocks with higher yields it is important to understand the sustainability of that dividend, how much the dividend is covered by earnings and free cash flow, or ongoing capital generation in the case of a bank… and also to think about whether there is anything on the horizon that could change the cash-flow dynamics such as an increased need for investment.”

This view is echoed by Connaghan, who says, “The ability to sustain and grow dividends is essential. Companies with a high cash-conversion ratio, dividend cover and free cash-flow yield should be in a much stronger position to do this.”

Free cash flow is generally defined as the cash flow generated by operations, excluding the costs of running the business and capital expenditures. In a traditional capital allocation framework, if a firm has free cash to spend, it should first reinvest it back into its operations if it can achieve an attractive and sustainable return on investment. If this opportunity is not available, the company should use the money to reduce debt, and if it has no debt, return the money to investors.

Cash flow figures give us a real, unabridged version of what management is doing with a company’s funds. Investors often turn to earnings before interest, tax, depreciation and amortisation (Ebitda) as a proxy for cash flow, as that’s the metric companies usually like to present. However, this ignores essential business costs, such as the replacement of capital equipment, interest on debt and taxes.

Similarly, a simple dividend cover calculation, which generally takes earnings per share divided by the dividend per share, also provides a misleading picture. Earnings per share do not account for all capital expenditure, particularly on long-term assets, which can be extremely costly for capital-intensive companies. When a company pays a dividend, the money leaves the business. That means the capital must be truly surplus to requirements to prevent problems emerging at a later date.

History is littered with companies that have paid out too much during the good times and have struggled with weak balance sheets and a lack of shareholder support in the bad.

The best dividend stocks

The best dividend stocks are those in companies that strike a balance between operational costs, including capital expenditures, and prudent balance-sheet management, along with sensible dividend policies. And they avoid the damaging concept of a “progressive dividend policy”. Progressive policies envisage the dividend rising steadily year after year. They are designed to provide security for investors. In fact, they do the opposite.

Companies always have and always will go through cycles, and making a commitment to increase a dividend year after year, no matter what, forces management into wrong decisions. It’s difficult to cut a dividend when such a policy is in place, which often puts firms in difficult positions, having to pay out more than they can afford.

Some of the most sensible dividend policies are based on small regular payouts, with annual special dividends based on profit throughout the year. This gives more flexibility, allowing management to announce additional distributions as needed without putting undue stress on the balance sheet. Managers can also choose to alternate between dividends and share buybacks, the latter being easier to turn on and off depending on the business environment.

FTSE 100 insurance giant Admiral is an excellent example. Car insurance can be a volatile and unpredictable business. It moves between a hard market when insurance prices are rising and profits are plentiful and a soft market where competition intensifies, prices fall and insurers have to stomach big losses. Managing a business through this cycle requires financial flexibility and a strong balance sheet, so Admiral cannot afford to commit itself to an unsustainable dividend policy. Instead, it commits to distribute 65% of its post-tax profits annually as a regular dividend, supplementing these distributions with special payouts.

For example, for the first half of the year, Admiral declared a regular dividend of 85.9p per share and a special dividend of 29.1p per share, for a total distribution of 115p, or 88% of post-tax profit. This was a pretty hefty interim distribution for the group. In 2021, a bumper year following the pandemic, which forced a change in driving habits and a substantial reduction in accidents, the company’s annual dividend payout reached just under 280p per share. However, in the following years, as drivers returned to the road and started crashing into each other, the company reduced its distribution in line with falling profits. For the 2023 financial year, it paid out just 103p across both its interim and final dividends.

Another example is CME Group. It pays a regular quarterly dividend, equivalent to a yield of about 2% per year. It supplements this with a special distribution at the end of the year based on annual trading performance. Last year, for example, the company paid out four regular dividends of $1.15 per share and one final special dividend for the year of $5.25.

The perils of a regular dividend policy became all too clear in the mining sector back in 2016. That year, commodity prices slumped as China’s previously meteoric growth started to splutter to a halt, leaving mining giants such as BHP, Rio Tinto, Glencore and Anglo American in a difficult position. Not only had these companies made a commitment to hefty, regular, progressive dividends based on past profitability, they had also spent and borrowed heavily to fund growth.

As commodity prices and revenue plunged, something had to give. BHP cut its interim dividend by 75%, the first cut since 1988, and abandoned its progressive dividend policy. Rio also slashed its dividend in half and Glencore was forced into a messy restructuring involving a $2.5 billion cash call, as well as a dividend cut.

In another example, BT had to cut its dividend in 2020 when management realised the company needed to spend more on its fibre build-out to keep up with the competition. This was a big blow for income investors as prior to the cut BT was often touted as one of the UK market’s top income plays.

Where to hunt for dividend income

Sensible capital allocation is a good indicator of dividend quality, as is the overall quality of the business. Quality can be defined in many different ways. Warren Buffett summed it up quite well in his letter to shareholders of Berkshire Hathaway in 1996: “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10 and 20 years from now.”

To put it another way, a quality company is one that has a strong competitive advantage and a long runway for growth. A strong competitive advantage also typically translates into higher-than-average profit margins, providing the company with ample cash to invest in marketing, growth and debt repayment, and to return funds to shareholders.

James Harries, co-manager at STS Global Income & Growth Trust, says the best income stocks are “predictable, resilient, high-quality businesses” you can “say something sensible about on a five-,seven- and 10-year view”. That often means sticking with the companies that he describes as “steady as she goes” – they often “grow slower, but [grow] more persistently”.

A great example of the strategy, and a recent addition to the portfolio, is Nike. “It’s the highest quality global sports brand,” notes Harries, and though the company is going through some turbulence, “I’m pretty confident that we’re buying a really high-quality asset at a very attractive valuation”. Nike is one of the best-known and valuable consumer brands in the world, boasts a gross profit margin of more than 40%, and has billions of dollars in net cash on the balance sheet. It’s also rewarding shareholders, with $591 million in dividends in the first half of 2026 and $18 billion returned via share buybacks since June 2022.

The utilities sector can also be a good place to hunt for income. “Often a utility company operates in a regulated sector that is supported by a long-term concession contract, which will stipulate the return that can be generated over the life of the concession,” notes Jacqueline Broers, co-portfolio manager at Utilico Emerging Markets. As a result, cash flows can be more “resilient” and “predictable” than those of other sectors. “All of which translates into a more sustainable long-term dividend payout.”

Broers highlights the example of IndiGrid Infrastructure Trust, which owns 41 power projects comprising 17 operational transmission projects, three greenfield transmission projects, 19 solar generation projects, and battery energy storage (BESS) projects located across 20 states and two union territories in India. The average remaining contract life on the company’s transmission assets is just under 26 years, with contracted revenues underpinning the company’s dividend yield of about 10%.

The other advantage utilities tend to have is the prohibitive replacement cost of their assets. Take UK-based National Grid, which owns the majority of the UK’s high-voltage transmission network, comprising thousands of miles of cables and transmission stations. Building these assets from the ground up would be virtually impossible today, not to mention the vast cost. That gives the company a robust competitive advantage.

Utilities aren’t the only companies that can have such an edge. Connaghan points to the likes of Grupo ASUR, a Mexican-listed airport operator with 16 assets across Central and Latin America. “Its key asset is Cancun airport and the company has seen its passenger numbers increase by a compound annual growth rate of 6% over the last 35 years,” he says. “Such was the financial strength of this business in the earlier part of this year that in April, they announced two 15-peso special dividends in addition to a regular dividend of 50 pesos. This put the stock on a 14% dividend yield.”

The fund manager also highlights the likes of Enbridge, a Canadian pipeline business which transports and stores natural gas and oil through its network, which spans North America. The company has grown its dividend for 30 years in a row. “This type of business is far less exposed to the underlying shifts in the commodity prices themselves, as 98% of its Ebitda comes from assets backed by either regulated returns or take or pay agreements,” he notes.

Investment trusts for dividend income

The structure of an investment trust lends itself to income investing. Not only do they give investors access to a well-diversified portfolio of income stocks, but they can also pay dividends out of both capital and income, unlike ETFs and other open-ended investments. That means trusts are more likely to be able to sustain their dividends in periods of market volatility. Trusts with a global mandate also have far more flexibility in where they can invest so they can pick the best income, quality and growth plays in the world.

JP Morgan Global Growth and Income (LSE: JGGI), Murray International (LSE: MYI), Scottish American (LSE: SAIN) and STS Global Income & Growth (LSE: STS) all have a global mandate. Ecofin Global Utilities and Infrastructure (LSE: EGL) has a global mandate within its utility sector. Others, such as Law Debenture (LSE: LWDB) and Temple Bar (LSE: TMPL), have a UK focus, but with some international holdings.

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Boarded-up shop fronts and permanently closed department stores have become a common sight across Britain in recent years. As large chains collapse, online retailers gain market share and out-of-town retail parks grow, city centres are at risk of becoming ghost towns. How can the butcher, the baker and even the candlestick maker survive changing thoroughfares?

High streets have been facing years of decline, exacerbated by Covid, as consumers’ confidence struggled amid the cost-of-living crisis, high inflation and high interest rates. This has forced more people to shop for cheaper deals online and on second-hand marketplace platforms such as Vinted and eBay.

“Britain’s high streets are in the middle of a painful reinvention,” says Tom Gray from brand experience agency Imagination. “The 11th-hour rescues of familiar names like Claire’s and Poundland may offer a glimmer of a lifeline, but in reality mark the end of a retail era built on uniformity and convenience.”

There is now a discernible shift towards a “post-stuff era” where “over-consumption, sameness and algorithmic e-commerce have dulled the excitement of discovery”, says Christopher Sanderson from strategic consultancy The Future Laboratory. “Retailers have failed to evolve beyond the ‘sell, sell, sell’ model, and consumers are now seeking emotional connection, cocreation and community.”

These advantages now belong to online retailers, argues Gray. Bricks-and-mortar shops “must offer something digital retail can’t – a sense of experience, emotion and belonging… The retailers that will thrive are reimagining their spaces as cultural and community hubs, not just transactional zones.”

Reimagining the high street as a creative experience

“Retailers must think like curators, not shopkeepers,” adds Sanderson. That involves thinking about retail as a way to connect people. Successful high-street models could focus more on cinemas, museums and pop-up events, transforming traditional shops into exhibition spaces, particularly if they aim to attract teens and 20-somethings, who are leading the charge to revive shopping centres. According to a 2024 report by analytics firm RetailNext, Generation Z (those born between 1997 and 2012) are more than twice as likely to shop in a physical clothing shop each week as the average consumer in Britain (28% versus 13%).

Le Bon Marché department store in Paris has taken a novel approach to retail by staging a theatre after it closes. In London, Victoria Beckham has curated an exhibition of her favourite artists at her eponymous brand’s shop, while LVMH’s Louis Vuitton has turned some of its shops around the globe into immersive art spaces through collaborations with artists such as Yayoi Kusama. The French luxury brand has also built a 30-metre-high shop shaped like a ship called The Louis in Shanghai, with dining and exhibition areas. It has even become a tourist attraction.

Prada-owned Miu Miu has launched several “storyliving” pop-ups, such as the one in Covent Garden last year, where the Italian fashion brand gave away free copies of classic novels by female authors.

“These are not gimmicks,” says Gray, but “blueprints for the future… The next decade will see the high street evolve from a place of purchase to a place of participation where the future won’t be purely commercial; it will also be social, creative and experiential. The winners will be those who see their stores as platforms for brand-building and IRL [in real life] customer engagement where commerce, culture and community overlap.”

Will small high street businesses survive?

Shops are likely to keep disappearing, however – for now, at least. High rents, often the highest cost for small businesses; regulation that has “increased in length and complexity” and can deter refurbishments; and the continued draw of online shopping are still headwinds, says Jean-Baptiste Wautier, an investor and co-founder of the Wautier Family Office.

With these macro trends, it is probable that high streets will continue to shrink in terms of point of sale and only favour big brands, which could hamper local businesses. “Only a major real-estate shock, like a major price drop and major deregulation, could invert this trend,” says Wautier.

Still, it’s hardly all gloom. Even though challenges remain, retail rentals rose 2.3% in the first half of 2025 across all sub-sectors and vacancy rates declined, according to estate agent Knight Frank. Retail investment is also shifting as “prime yields on high street properties have strengthened, and the best spaces are seeing competitive bidding”, says Sophie Levenson from Knight Frank.

The central London estates managed by real-estate investment trust Shaftesbury Capital provide a “glimpse of what all high streets would hope to achieve”, says Danni Hewson, head of financial analysis at AJ Bell. “A carefully curated mix of different stores, from brands to unique retailers that appeal to the local demographic, mixed with a diverse menu of bars, restaurants and cafes. These experiences give people a reason to linger longer, and offices and residential spaces provide consistent footfall. It looks effortless, but every decision is carefully weighed, and every tenant [is] supported to thrive,” she adds.

Still, for all high streets to flourish, government support is crucial, and policy needs to shift from retail preservation to cultural regeneration. “Support should prioritise mixed-use zoning, flexible leasing for pop-ups and independent brands, and incentives for creative, wellness and community-led operators. Recalibrating business rates to reward [their] cultural contribution and [impact on sustainability] would better reflect how high streets now create value,” says Sanderson.

While town planners need to allow spaces to evolve to meet the shifting demands, “for investors, the upside lies in the infrastructure around retail, from tech-enabled platforms and urban logistics to regeneration-led property plays that blend commercial returns with social value”, says Livia Bernadini, CEO of retail technology company Future Platforms.

Still, spending power remains a key component of rejuvenating the high street, as people can’t spend as much as they used to. “Even though salaries went up (partially due to government pressure put on businesses to pay more), it’s completely disproportional to the rising cost of living… In addition, even though minimum wages have been rising”, fiscal drag continues, says Iván Marchena, an economist from broker Just2Trade.

The high street brands likely to thrive

High-street shopping’s future lies not in competing with online retail but in enhancing its offering. The brands that succeed will treat AI not as automation, says Sanderson, “but as augmentation, used as a tool for empathy, intuition and cultural resonance”.

The likes of Next (LSE: NXT), a bellwether for Britain’s retail industry, is a case in point. The clothing and homeware retailer has adapted well to technology and changes in consumption. It leveraged its bricks-and-mortar chain and catalogue infrastructure that included warehouses, delivery networks and consumer data to build a strong online platform that even hosts other brands.

“True omni-channel brands like Next are likely to continue to thrive because they understand how to harness brand, ease of use, availability and tech to their and their shoppers’ advantage,” says Hewson. “Brands that can continue to appeal to their shopper, to either evolve as their shopper ages or shift to appeal to a new shopper, will survive, but they need to have a clear USP [unique selling point] and never lose sight of the day after tomorrow.”

JD Wetherspoon (LSE: JDW), one of Britain’s most popular pub chains, can say it has remained loyal to its brand and customers as a bargain boozer with the same decor and menu in every venue.

Despite grappling with high energy and labour costs, the group posted a 4.5% year-on-year rise in sales to £2.12 billion for fiscal 2025 and plans to open 15 managed pubs and about 15 franchised ones this financial year. It is also planning to expand into mainland Europe for the first time with a pub at Alicante airport in Spain.

Brendan Gulston, co-manager of the WS Gresham House UK Multi Cap Income Fund, sees structural growth in “low-ticket experiential leisure” companies such as Hollywood Bowl (LSE: BOWL), which is “taking wallet share from consumers compared with traditional hospitality segments”. Firms that cater to niche hobbies and enthusiasts, such as Angling Direct (Aim: ANG), Britain’s leading fishing tackle and equipment retailer, are another “strong” area.

Angling, for instance, “benefits from both a loyal customer base as well as an omnichannel proposition”, and “ongoing e-commerce adoption/channel shift is a supportive dynamic for growth”.

Overcoming the doom and gloom

“These companies have delivered strong operating performance despite the broader challenges facing UK consumers, yet the sector as a whole continues to trade at depressed valuations,” Gulston says. “Crucially, their success is not dependent on a rapid recovery in consumer confidence or the macro environment, but if conditions do improve, we believe earnings will gain an additional tailwind – creating the potential for a sharp rebound in share prices and a rerating from current lows.”

Darius McDermott, managing director of FundCalibre, believes the outlook for household spending “isn’t as pessimistic as some might like to think”. Lower inflation coupled with strong income growth could boost households, which would in turn lift UK consumer stocks. “This creates a clear value opportunity as the outlook for consumers gradually improves,” McDermott says.

“Artemis UK Select Fund, one of the standout UK equity funds with a strong long-term record, has more than 20% invested in consumer discretionary stocks,” and counts Marks & Spencer (LSE: MKS) among its top holdings. “VT Tyndall Unconstrained UK Income, which has a bias towards mid caps, shows similar conviction, with almost a quarter of its portfolio in discretionary names.”

For investors looking further down the market-cap scale, McDermott points to the Premier Miton Tellworth UK Smaller Companies Fund, which has allocated 18% to the sector. “With UK retail names heavily domestically focused, small- and mid-cap funds, in particular, can provide an effective way to tap into the recovery story,” he adds.

Reports of the death of the high street appear exaggerated. As thoroughfares become more omnichannel and experience-led, high streets are set to remain vital hubs for shopping, communities and local culture. They will still, however, require a benign consumer economy to thrive.

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Simon Wolfson is widely regarded as the most able CEO of any FTSE-100 company. He joined Next, of which his father was then chairman, in 1991, was appointed to the board in 1997 at the age of 30 and took the top job in 2001. Next had been founded as a mid-market fashion retailer in 1981, but over-expanded and nearly went bust in 1988. Under Wolfson, it has expanded internationally, acquired other brands and gained a market value of £18 billion. He is well worth listening to.

When asked which business book he’d recommend, he replies, “Just one. Bill Slim’s Defeat into Victory”. This is the book, first published in 1956, by Field-Marshal William Slim about how he led the British 14th Army in the retreat through Burma in 1942; in the defence of India against a determined attack in 1944; and in the subsequent rout of the Japanese forces in Burma by June 1945. This was despite extraordinarily difficult terrain; being outnumbered, under-equipped and undersupplied; and the ferocity of Japanese defence. What lessons does this book hold for business managers 80 years later, and how did Wolfson apply them to Next?

Slim’s senior commanders were all people who he had got to know and trust years before, to whom he could delegate tasks with confidence. Similarly, Wolfson promotes internally, rather than recruiting from outside; 28 of his top 30 managers were promoted and have been at Next for a combined 500 years.

Slim displays a determination to get on with, even like, notoriously difficult people on the same side. These included “Vinegar Joe” Stilwell, the American in command of Allied forces who served as Chiang Kai-Shek’s chief of staff; Orde Wingate, commander of the Chindits commandos, who did not regard Slim as his commanding officer; and Aung San, the Burmese nationalist leader. He also cultivated strong relations with the Americans, with the RAF and with Louis Mountbatten, the Allied commander in the Far East. The lesson for Wolfson? Learn not just to get on with, but also to respect and like the people you need in order to be successful.

Simon Wolfson's leadership style

Morale was critical to Slim’s success. “I made a point of speaking myself to every combatant unit, or at least to its officers... whether British, Indian, Gurkha or African. My platform was usually the bonnet of my jeep with the men collected around it and I often did three or four of these stump speeches in a day.” Wolfson too makes a point of visiting outlets, distribution warehouses, design centres and offices as often as possible.

Slim had an overarching strategy, but was prepared to be flexible if circumstances and dispositions changed. In fact, he regarded Japanese inflexibility as a key weakness, meaning that they would be thrown into confusion if the 14th Army did not respond as expected. Likewise, Wolfson emphasises his scepticism about an inflexible long-term strategy and the importance of being able to respond to changing circumstances. Hence, the acquisition of other brands such as Joules and Cath Kidston and expansion overseas when technology made it economic to do so.

Slim was very willing to acknowledge failure and recognise mistakes. He regarded it as important to learn lessons and move on; “the lessons from defeat are more than from victory. A defeated general will turn in upon himself and question the very foundations of his leadership, but if he is to command again, he must shake off these regrets as they claw at his will and self-confidence”. Wolfson is never publicly flustered and always willing to admit to setbacks.

He admires Slim for his willingness to retreat, as he did before the Japanese offensive in 1944, rather than stubbornly defend a poor position. The result was a mixture of caution and boldness: “when in doubt about two courses of action, a general should choose the bolder”, he writes. A CEO should too.

Wolfson probably hasn’t had to improvise to overcome shortages in the way Slim did: he had river craft built, roads constructed and even parachutes made out of jute to overcome the lack of silk and special cloth. Supply problems were a challenge to be overcome, not an excuse for inaction. Wolfson can probably supply comparable anecdotes. Like Slim, he sets great store by intelligence; in Burma, it was a question of the location and condition of Japanese troops; for Wolfson it is gauging how the market is developing and changing.

But the most important aspect both leaders share is their regard for the importance of logistics. For Slim, this was the supply of food, fuel and ammunition, maintenance of vehicles and treatment and evacuation of the wounded. Much of the logistics in 1944-1945 was airborne, which meant control of the skies, building forward airfields and the accumulation and distribution of stores. The inadequacy of their logistics was why Japanese casualties were so much higher.

For Wolfson, logistics means managing supply chains, the distributions to stores, handling of returns and integration of service all along the chain. You might think that wars are won on the battlefield and retail success at the point of sale, but without good logistics, generals and retail CEOs fail. Slim focused on the whole army, not just the frontline troops. “Everyone in the army had to be made to see where his task fitted into the whole”. The same applies in any business.

Slim combines intense regard, liking and loyalty towards those on his side with disdainful ruthlessness towards the Japanese. Perhaps Wolfson has a similar attitude to those who cross him in business, but any potential enemies would be well advised not to find out.

After the war, Slim went on to become chief of the Imperial General Staff and governor-general of Australia. He was a highly regarded lecturer on leadership and died in 1970. If Wolfson ever writes a management book, it too will be well worth reading.

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During the pandemic, profits across the global luxury sector jumped as consumers, unable to spend their disposable income elsewhere, splashed out on high-end purchases. This pulled forward a lot of demand, and over the following years, sales flagged. The S&P Global Luxury index of the 80 largest publicly traded companies engaged in the production or distribution of luxury goods jumped 65% between the beginning of 2020 and the end of 2022. From January 2023 to today, it’s added just 2% excluding dividends.

LVMH (Paris: MC), the world’s largest luxury-goods group, managed to buck the trend until mid-2023, when industry headwinds finally started to affect the group. Revenue fell 2% in 2024 and net income slumped 17%. The decline continued in the first half of 2025. Revenue declined 4% in the first six months of the year and net income fell 22%. However, there are signs that the worst of the slump is coming to an end – and the world’s largest luxury group is ideally placed to ride the recovery.

The tide turns for LVMH

For the third quarter, LVMH reported group sales of €18.3 billion, down 4% year-on-year, but 0.6% ahead of analysts’ consensus. Growth returned in the US market and Asia ex-Japan. Japanese sales declined 13%, but were stronger than the previous decline of 28%. European sales fell 2%, faster than the 1% recorded in the second quarter. One of the most interesting spots was China. Mainland China returned to positive growth in the quarter with management flagging the success of The Louis, a ship-shaped Louis Vuitton store, cafe and exhibition in Shanghai. Local Chinese consumption grew by mid-to high-single digits; Chinese tourists’ spending improved, but remained down by double digits.

LVMH’s results confirm that some level of stability has returned to the market and, for the time being at least, consumers’ spending on luxury goods has stabilised. In a recent note on the luxury sector, analysts at JPMorgan concluded that while “trends remain challenging” across Asia, North America is picking up due to “healthy spending among Americans across income groups, supported by strong equity markets and wealth creation”. It’s the high-end American consumer who is set to pick up the slack for the rest of the world.

According to Berenberg research, the “top-quintile” earners in the US are expected to see the largest benefit from Donald Trump’s recent swathe of tax cuts, with a projected 3.4% increase in after-tax income for the richest. The top 0.1% will see an average federal tax saving of $286,440. The spending power of the top 1% will also benefit from the recent equity rally and lower interest rates. High-net-worth households own the majority of US assets, with the top 1% holding 28% of the total.

This trend was apparent in the results of LVMH’s peer Hermès (Paris: RMS). The firm is more focused on the top segment of the market than LVMH, which has a more diverse portfolio, but its results showed where the strongest demand is emerging. In the third quarter, sales grew 10% excluding headwinds from foreign exchange, with US sales up 14% and Asian sales 6%. Sales of its bags and watches rose 13% and 9%, respectively; perfume sales fell 7%.

LVMH’s fashion and leather-goods arm, the group’s largest, which includes brands such as Christian Dior and Givenchy, and makes up around half of sales, was the worst-performing segment in the first nine months of 2025. But the group’s watches and jewellery arm, which includes Tiffany, grew 2% organically year on year.

LVMH’s strength lies in its diversification globally and across product lines. The group’s management structure also aligns with the quality-first approach to luxury retailing. Bernard Arnault took over LVMH in 1989 and he remains the largest shareholder. He’s inserted his family into key management roles and continues to build his stake on weakness. Under Arnault’s stewardship, LVMH has prioritised investment in brands over short-term margin protection. Some selective deals have also been explored. The latest rumours are around a sale of its 50% stake in Fenty Beauty, which it co-owns with Grammy Award winner Rihanna. Fenty Beauty, which generated around $450 million of net sales in 2024, could be valued at between $1 billion and $2 billion.

Should you add some luxury to your portfolio?

The market is also waiting to see if LVMH makes a bid for Armani. Giorgio Armani’s will named LVMH as a preferred buyer for a minority stake in Armani (along with EssilorLuxottica and L’Oréal) and the deal would make a good fit for the luxury giant. Berenberg has estimated the business could be worth as much as €5 billion-€7 billion, easily affordable for LVMH, and it would boost the group’s exposure to the affordable-luxury market. There could also be scope for the group to improve Armani’s profitability and margins through its economies of scale and its existing distribution networks.

Analysts have thrown their weight behind LVMH in recent months. UBS has upgraded the stock to “buy” and said “we believe that the self-help measures introduced… combined with strict cost management and slowing space expansion, will drive a stabilisation in margins in 2025 and a return of positive… momentum” in earnings per share. Berenberg too has cited self-help measures and stability in key markets as reasons for optimism. As headwinds become tailwinds, it could be time to add some luxury to your portfolio.

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In an era where digital communication dominates, the enduring appeal of a handwritten card might seem quaint. Yet, for Card Factory (LSE: CARD), the UK’s leading specialist retailer of greeting cards, gifts and celebration essentials, this personal touch is the cornerstone of a surprisingly resilient business. Despite the rise of online cards, enough customers still value the sentiment of a physical card to keep Card Factory’s model relevant. Combine this with low-priced products, a repeatable purchase cycle and a remarkable recovery from the pandemic, and you have a company that’s not only surviving but flourishing.

Despite these qualities, the shares look good value too; trading on a price-earnings (p/e) ratio of less than seven – a standout bargain even among the UK’s undervalued small-cap stocks. For investors, this could be a rare chance to buy into a business with solid fundamentals and decent growth prospects at a deeply discounted price.

Card Factory is a high-street mainstay

Founded in 1997 by a Yorkshire entrepreneur as a market stall, Card Factory has grown into a high-street mainstay, with more than 1,000 stores across the UK and Ireland. It also operates an online platform, which competes with Moonpig and Funky Pigeon. Its core offering of affordable greeting cards, balloons and party supplies taps into a cultural habit that shows no sign of fading. While online platforms such as Moonpig have gained traction, particularly during the Covid lockdowns, Card Factory’s success hinges on the fact that many consumers still prefer choosing and sending a physical card. A handwritten note for a birthday, anniversary or condolence carries an emotional weight that an online printed card does not.

This preference is reflected in the numbers. The UK greeting-card market, while slow-growing, remains stable. Card Factory’s value proposition – offering cards starting at under £1 and gifts priced to suit tight budgets – ensures it captures a significant share of the market. Its vertically integrated model, with in-house design, printing and warehousing, keeps costs low and margins healthy.

Card Factory’s business model is uniquely suited to weather economic storms. Its low-price goods are affordable even when household budgets are squeezed. The repeatable nature of its products, tied to recurring occasions such as birthdays, Mother’s Day and Christmas, ensures steady demand regardless of the economic climate. Unlike discretionary retailers selling big-ticket items, Card Factory benefits from consumers’ reluctance to skip small, sentimental purchases, even during downturns. This resilience was evident in the firm’s performance during recent economic challenges.

While rising energy costs, freight inflation and National Living Wage increases have pressured margins, Card Factory has offset these through targeted price increases and tight cost control.

Card Factory's remarkable dividends

The only time Card Factory genuinely faltered was during the Covid pandemic, when high-street footfall plummeted. The company took a brutal hit. Dividends have been a hallmark of Card Factory’s shareholder-friendly policy since its 2014 flotation, but they were suspended during the pandemic.

The recovery coincided with a return to normality. By 2023, sales had surpassed pre-pandemic levels. Store transaction volumes, while still below pre-pandemic levels, have rebounded strongly, driven by high-street footfall and click-and-collect services. Online sales, although slightly down post-reopening, remain significantly ahead of pre-pandemic figures, reflecting a lasting shift in consumers’ behaviour. Most tellingly, Card Factory reinstated its dividend in 2024, declaring an interim payout for the first time in five years, a clear signal of confidence in its cash flow and long-term outlook.

Despite this turnaround, Card Factory’s shares remain extraordinarily cheap for a business with stable revenues and reinstated dividends. Even in a UK market brimming with undervalued small-cap stocks this valuation stands out and, with a high dividend pay-out, investors earn a return even while waiting for the market to wake up to the potential.

Card Factory’s growth prospects add to its appeal. The firm is expanding, with new openings planned, and it is enhancing its online platform. A recent $25 million acquisition of Garven, a US-based card retailer, signals ambition to tap the potentially lucrative US market, although investors are watching closely for its financial impact. Partnerships, such as with Aldi, and a focus on higher-ticket items such as balloons and party supplies, are expected to drive revenue growth of 5%-7% annually over the next few years.

No investment is without risks. Card Factory’s reliance on physical stores makes it vulnerable to shifts in consumers’ behaviour.

Inflationary pressures, especially in freight and labour, could continue to squeeze margins, and the company’s debt pile, while manageable, requires careful monitoring. Yet these risks seem more than priced into the current valuation. With a strong cash flow and a diversified revenue stream, Card Factory is well-positioned to navigate challenges. Its ability to outperform competitors in key trading periods, such as Valentine’s Day, underscores its market strength.

Card Factory may not be glamorous, but its resilience makes it a compelling opportunity. Its recovery from the pandemic has been robust, with revenues above pre-pandemic levels and dividends back on the table. Trading at a historically low valuation, with decent forecast growth, the shares are a bargain in a market full of cheap stocks.

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What’s happened to UK pubs?

The number of pubs calling last orders and closing their doors permanently has hit more than one a day for the first time, according to government statistics. In the first half of 2025, some 209 pubs in England and Wales called time forever – that’s eight a week, up from six a week last year. In all, some 2,283 pubs have vanished from communities across Britain since the start of 2020 – either demolished or converted to other uses. The British Beer and Pub Association (BBPA), which represents more than 20,000 pubs in the UK, says that across England, Scotland and Wales, closures are set to total 378 this year, at a cost of 5,600 jobs. That’s a rise from 350 closures last year and continues a decline that has seen 15,000 pubs (one in four) close for good since the start of the century.

Why are so many UK pubs closing?

Covid lockdowns and their legacy of debt made things worse, but the trend has been downwards for well over a century. In 1870, for example, there were 115,000 pubs and “beerhouses” in the UK, says Andrew Ellson in The Times – one pub for every 130 people. Today, there are about 45,000 – one for every 1,000 adults. The number of pubs started falling in the late 19th century with tighter licensing laws and the temperance movement. Later, World War I reduced the number of men, and the Defence of the Realm Act restricted opening hours. By the 1960s, there were 75,000 left, with many succumbing to urban redevelopment, shifting social habits and cheaper “off-licence” alcohol. The long-term decline levelled out in the 2010s, but since then, numbers have fallen steadily once more.

Why are UK pubs closing so rapidly?

Falling demand, higher costs and more burdensome regulations. Young people are going out less and not drinking as much when they do. Younger adults haven’t abandoned pubs; according to industry data, 86% of Gen-Z adults (aged up to their late 20s) have visited a pub in the last three months. But they are drinking less than previous generations, and all generations have become more health-conscious. In recent years, the industry’s challenges have been “numerous and substantial”, says Lex in the Financial Times. These include competition from supermarkets, sizeable debt piles from Covid, and higher costs – including for energy, and wages as a result of higher national insurance and minimum wages.

Are UK pubs closing because of business rates?

Hospitality businesses previously received a 60% discount on their business rates up to a cap of £110,000, but Rachel Reeves cut this to 25% in April, angering many in the pub trade. Alex Probyn, of commercial real-estate specialists Ryan, said the higher costs are “all quietly draining profits until staying open becomes impossible”. He calculates that changes to the relief for pubs have landed them with an extra £215 million bill. “For a small pub, that’s a leap in the average bill from £3,938 to £9,451 – a 140% increase.”

Can anything stop UK pubs closing?

People are still going to pubs, especially when the sun’s out; during Britain’s warm spring and summer the three biggest pub chains all reported rising sales. In July, JD Wetherspoon, which has more than 800 pubs, said turnover was up 5% over the previous three months. Young’s saw sales jump 7%. Mitchells & Butlers had a 5% increase. Yet a rally in share prices earlier this year has faded – a familiar story for long-suffering investors. On average, pub-group valuations on an enterprise value/Ebitda basis fell between 16% and 28% in the decade to 2024, according to S&P Capital IQ’s data. Shares in Mitchells and Butlers, Marston’s, Young and Co’s Brewery, Fuller Smith & Turner, and JD Wetherspoon are all trading lower than they were 10 years ago.

What do UK pubs want?

Last week the government announced a fast-track review on what the government has termed “outdated” licensing rules. This could mean pubs and bars in England and Wales being allowed to stay open later. The plans could also make it easier for venues to serve food outside and host more live music. “But it simply isn’t enough to turn the tide, and landlords up and down the country know it,” says William Sitwell in The Telegraph. What’s really needed is a reversal of the rise in employer’s national insurance; tax cuts aimed at the hospitality sector (for example, lower VAT rates and higher business rates relief); and a targeted plan to turn round the sector. Otherwise, the numbers closing will only increase.

How are UK pubs changing?

Country pubs, sports bars, gastropubs and hipster microbreweries selling local cask ales – “each have their own take on what it is to be a pub – from dingy bars to overpriced restaurants”, says The Economist. One common theme is food: even at JD Wetherspoon – famed for its cheap alcohol – bar sales have fallen from 76% to 57% of total revenue since 2008; food has gone from 18% to 38%. Another theme is diversification and entertainment. Where once pubs encouraged punters to stay with dartboards and pool tables, today it’s karaoke and theme nights. To keep Gen Z coming, pubs need to take a lesson from the rise of “competitive socialising” venues.

What else could stop UK pubs closing?

Some are becoming more like cafes, offering all-day menus, upmarket coffees and a wider range of drinks. Others are cultivating a new kind of “regular”, with loyalty schemes and themed events around occasions such as Halloween. Existing regulars may “sob into their pewter pint mugs to see their local pub offering kids’ pumpkin carving come late October”, says Lex. But pubs have always evolved and will continue to do so. George Orwell, describing his Moon Under Water pub in 1946, reckoned “beer tasted better served in china mugs and lamented the disappearance of strawberry-pink ones. Perhaps a hipster pub might reintroduce them?”

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The trust is an actively-managed investment vehicle providing investors with broad access to China’s growth opportunities, from established technology leaders to entrepreneurial private businesses yet to list. Chinese equities have advanced strongly this year despite US-China trade tensions and a subdued property market. Low initial valuations and improving sentiment towards sectors driven by innovation (following DeepSeek’s breakthrough AI model) have also helped.

We focus on identifying companies with scalable growth potential, a sustainable competitive advantage and strong execution by managers. These often align with beneficiaries of long-term structural growth trends, such as China’s expanding domestic consumption and rapid technological innovation.

A particular emphasis is also placed on smaller, under-researched firms, offering attractive opportunities in mispriced stocks with healthy prospects. Here are three businesses the trust currently invests in.

China's growth opportunities

Hesai Group (Nasdaq: HSAI) is the world’s leading automotive LiDAR [light detection and ranging] provider, uniquely positioned at the heart of the fast-growing autonomous mobility revolution. As LiDAR becomes an essential component in advanced driver assistance systems (ADAS), Hesai’s ability to deliver superior technology at competitive prices sets it apart. As the market expands, Hesai is set to benefit from strong demand in increasingly sophisticated ADAS, which should help lead to substantial volume growth. While the vehicle industry will drive growth for many years ahead, there is also strong potential in other forms of mobility and robotics in the longer term. In addition, significant scope for margin expansion exists as volumes ramp up.

Xtep International (Hong Kong: 1368) has established itself as a leading Chinese sportswear brand specialising in the fast-growing running segment. Benefiting from the trend towards trading down in sportswear, Xtep is well positioned, combining affordability with a relevant brand.

Its sponsorship of marathon events and recognition for its shoes’ performance strengthen the brand’s credibility, while the strong growth of its premium Saucony brand broadens the product mix and supports the expansion of margins.

In the meantime, the company is trading at compelling valuations, while a solid dividend yield underpins attractive total shareholder returns. With strong branding and exposure to one of China’s most resilient consumer categories, I see Xtep as a structural winner in the domestic sportswear market.

Full Truck Alliance (NYSE: YMM) operates as China’s dominant digital freight-matching platform, leveraging powerful network effects to match shippers with truckers more efficiently than traditional offline brokers. Its scale creates a strong “moat” (an enduring competitive advantage), with network effects set to extend the group’s lead thanks to greater efficiencies and lower costs.

As penetration deepens and take rates (the percentage of a transaction for facilitating a sale) rise, Full Truck Alliance (FTA) is well positioned to deliver sustained growth in revenues from commissions, underscored by a record of resilient earnings with robust recent quarterly results. Having first invested in FTA as a private company, I’ve retained my long-standing conviction in its business model and strong execution. Since its public listing in June 2021, it’s remained a key portfolio holding, offering durable growth potential as China’s logistics industry continues its structural shift online.

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Few companies embody the resilience of British retail quite like Next (LSE: NXT). From a near-collapse in the 1980s to becoming a high-street staple, Next has navigated seismic shifts in consumer behaviour, technology and economic cycles with remarkable agility. Under the stewardship of CEO Simon Wolfson, the company has transformed from a struggling chain into a multi-channel powerhouse, blending physical stores, a pioneering online platform and a logistics network so efficient it’s become a lifeline for other retailers. Its relentless focus on innovation, clear communication with investors and disciplined capital allocation have delivered exceptional returns for shareholders, bucking the trend of declining high-street footfall. Today, the shares of Next aren’t obviously cheap, but its record and growth prospects make it hard to bet against. For investors seeking a business that marries retail heritage with forward-thinking strategy, Next remains a compelling proposition.

In 1988, Next was teetering on the brink, with a share price below 10p and debts mounting. Over-ambition and a failure to focus on core strengths had left the company vulnerable. The turnaround began in the early 1990s under chairman David Wolfson and CEO David Jones. Jones closed unprofitable stores, sold manufacturing facilities and offloaded the Grattan business. A 1993 strategy unified store and catalogue shopping ranges, strengthening the Next brand.

However, a misstep in 1998, of ordering trendy, pricey clothing while understocking basics, dented profits. This underscored the need for disciplined execution. Enter Simon Wolfson in 2001, aged just 33. The son of former chairman David Wolfson, his appointment raised eyebrows. Yet Wolfson’s tenure now spans more than two decades, and he has silenced doubters, delivering one of the most impressive success stories in UK retail.

Wolfson’s golden age as Next's CEO

Since Wolfson took the helm, Next’s share price has soared from around £8 to well over £100, a 12-fold increase. This is just part of the story. Next has also delivered an impressive dividend record, inclusive of occasional large special dividends. An investment in Next at the time of Simon Wolfson’s appointment 24 years ago would have increased in value by almost 30 times (including dividends), far outpacing that of the wider stock market. Wolfson’s leadership blends strategic vision with operational rigour. He prioritised consistency of the brand, cost control and customer satisfaction, ensuring Next’s clothing and homewares remained fashionable, high-quality and fairly priced. His candid, long-term approach to capital allocation has been a hallmark. Unlike peers constrained by legacy commitments, Wolfson views investments through the lens of incremental returns, unencumbered by institutional pressures. This flexibility has allowed Next to pivot swiftly, whether embracing e-commerce or weathering economic storms.

Next’s success stems from relentless investment in technology and improvement in processes, often yielding unexpected benefits. A prime example is Next’s use of individual barcodes for each item, initially introduced to streamline the returns process. Customers could return items quickly, boosting satisfaction and lowering staffing requirements and the wage bill. An unintended consequence was a sharp reduction in theft.

Thieves could no longer claim refunds on stolen goods, as barcodes tied each item to a specific purchase. This enhanced profitability without additional cost.

This knack for innovation extends to Next’s “omnichannel” strategy. The Next Directory, launched in 1988, gave the company a head start in mail-order retail, positioning it to embrace e-commerce seamlessly. By 2001, Next was the only major UK clothing retailer profiting from online sales, helped by its early adoption of technology allowing customers to order in store, while competitors such as Marks & Spencer lagged. The Directory’s infrastructure – warehouses, delivery networks and customer data – became the backbone of Next’s online platform. Today, online sales account for almost two-thirds of revenue, with physical stores contributing the remainder through more than 800 UK locations and more than 250 international franchises.

Next’s “bricks and clicks” model integrates physical and digital channels seamlessly. Stores double as return hubs, click-and-collect points and mini-warehouses for online orders, reducing delivery costs. This approach mitigates the high return rates (up to 30%) typical in online apparel by making returns convenient. Wolfson’s decision to embrace rather than suppress returns has built loyalty among customers, with stores facilitating efficient processing. The result is a defensible advantage over pure online rivals reliant on subsidised shipping.

While high-street footfall has plummeted – down 20% on a like-for-like basis since 2019 for many retailers – Next has bucked the trend. Its stores, strategically located and easy to access, drive impulse purchases, with browsers often buying more than planned. In 2024, Next reported full-year revenues of £6.1 billion, with online sales growing strongly and store sales holding steady. This resilience stems from Next’s ability to evolve. Since 2005, store sales have fallen from 77% to around a third, while digital sales have surged. Yet stores remain profitable, unlike many peers that have been forced to close locations en masse.

Next’s appeal lies in the strength of its brand and its adaptability. Its own-label clothing, complemented by third-party brands via the Label platform, offers choice and value. Homewares, now 21% of sales (up from 10% in 2005), have diversified revenue. Partnerships with brands such as Victoria’s Secret and Laura Ashley, plus a fashion start-up launched in 2025, keep the offering fresh. By maintaining quality and affordability, Next attracts a broad audience, from young families to professionals, defying the high-street malaise.

Next is Amazon for apparel

Next’s distribution prowess is a game-changer. Its logistics network, honed over decades, rivals Amazon’s in efficiency, making Next a “quasi-Amazon” for UK clothing retail. Investments in warehousing, IT and supply-chain management enable next-day delivery for 80% of online orders, with cut-offs as late as 10pm. This speed and reliability have drawn third-party retailers to Next’s Total platform, launched in 2020, which offers logistics, marketing and customer-credit services. Brands such as Reiss and JoJo Maman Bebe now piggyback on Next’s infrastructure.

This platform strategy transforms Next from a retailer into an operating system, leveraging its 458 UK stores, 267 international franchises and global websites. Overseas sales, particularly in Europe and the Middle East, grew by double digits in 2023, reflecting high returns on marketing investments. By opening its platform to rivals, Next has created a new revenue stream while reinforcing its logistical dominance, an advantage few competitors can match. As with so much else, Next is the innovator in this area, which gives it the edge on the potential for driving greater returns from investment in third-party distribution agreements.

Next’s stock market updates are a masterclass in transparency, offering investors rare insight into its operations. Wolfson’s annual reports and trading statements are candid, detailing not just financials but strategic priorities, risks and consumer trends. For example, in 2021 Wolfson forecasted a shift to online dominance, predicting store sales would stabilise at 29% of revenue, a projection that proved accurate. This clarity builds trust. When the Covid pandemic hit, Next assumed the greatest risk was demand, not supply, and acted swiftly to bolster liquidity. Recent updates highlight a “healthier-than-expected” consumer economy, driven by pent-up demand and savings, reinforcing Next’s optimistic outlook. Investors benefit from this foresight, making Next a favourite among analysts and fund managers.

Next’s approach to capital allocation balances growth and shareholder returns. Operating margins of 20% and returns on capital of 50%-60% generate substantial cash flow, funding both reinvestment and payouts. Since 2000, Next has returned billions to shareholders, with an ordinary dividend yield regularly bolstered by special dividends in strong years.

When the shares have been cheap, the company has proactively bought its own shares and cancelled them, providing a significant increase in value per share. Since Simon Wolfson’s appointment, the share count has fallen by two-thirds, increasing the value of each share threefold in the process. By reducing the share count, Next has boosted earnings per share, contributing to its 13-fold increase in earnings per share since Wolfson took over. Buybacks are paused during crises such as the one in 2020, but resume when cash flow stabilises, reflecting Wolfson’s pragmatism. Investments prioritise long-term returns over short-term gains.

Paying a premium for Next

Next is currently trading at a value premium to the market and its own history. This reflects Next’s quality, but raises questions about value. The stock isn’t cheap, yet it is a business that has consistently and demonstrably become more valuable over time, perhaps justifying this premium. Other companies with such a large national footprint as Next would be seen as mature, but Next keeps finding new ways of becoming a bigger and more profitable enterprise. It continues to leverage its technological and operational excellence to become an increasingly vital part of retail infrastructure to many companies selling in the UK.

Risks remain. A consumer slowdown could hit discretionary spending, although Next’s affordable pricing offers resilience. Infrastructure costs for digital growth and staffing expenses strain margins, although this sort of investment is arguably a crucial component of Next’s long-term success. Wolfson is still only in his 50s, but questions about succession are beginning to be raised and few would bet that a successor could replicate his tremendous success. Online competition, such as from Shein, threatens market share, although Next’s brand, quality and logistics do provide a buffer.

Next’s strengths outweigh these concerns. Analysts project continued real annual revenue growth, driven by online expansion, third-party partnerships and international markets. The company’s ability to innovate makes it a unique retail play in the UK.

It is run by perhaps one of the best CEOs, if not the best, in recent British corporate history, and has such strong fundamentals that even when the current CEO chooses to retire, it will surely remain one of the best companies in the UK. Next isn’t a bargain, but it’s hard to bet against a company that’s consistently outmanoeuvred competitors for three decades. In a world where high-street giants falter, Next continues to make big strides.

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Sometimes the best opportunities don’t come from firms in glamorous, fast-growing industries, but from well-run companies that have carved out a niche for themselves in lower-profile, but no less profitable, sectors. An example of this is food distribution, which involves making sure that food from producers, both ingredients and prepared meals, reaches wholesale customers such as restaurants, and large institutional consumers such as supermarkets and hospitals. In this industry, Sysco (NYSE: SYY) stands out from all the rest.

Since food distribution is a low-margin business, the key to success is keeping costs to an absolute minimum. Sysco’s status as the largest food-distribution company in the US, supplying nearly one in every five restaurants or commercial kitchens in the country, means that it can use economies of scale to do its work extremely efficiently. As a result, even though its operating margins are only around 3%-4%, it makes a 20% return on capital employed. The fact that the food-distribution industry rewards scale also serves as a barrier against any potential competition, helping to protect both market share and margins.

Should you invest in Sysco?

Sysco isn’t resting on its laurels. It has pursued a policy of international expansion and now operates in 90 countries. This enables it to reduce costs further when it comes to sourcing the cheapest food from around the world, and also allows it to continue growing by entering new markets. Furthermore, the company has acquired food-service companies in other countries, such as last year’s acquisition of Scottish meat and fish supplier Campbells Prime Meat. All this has made it the largest food-distribution company in countries ranging from Canada to the UK, as well as the third-largest producer in France.

Sysco has a solid growth record, with its international sales expanding by an average of 17% a year since 2021; overall earnings have jumped by around 50% since 2021. Adjusted earnings have quadrupled during the same period. Even if you use pre-Covid levels as the point of comparison, profits have still grown by a third since 2019. It has also managed to increase its dividend continuously during this period, one of the few companies in the industry to pay out money to shareholders. Despite this, it is still reasonably valued, trading at only 16.7 times estimated 2026 earnings and offering a dividend yield of 2.8%.

In spite of Sysco’s long record of growing both earnings and dividends, its share price has had a mixed record, fluctuating over the past few years. This might be about to change. The shares have built up momentum over the past few weeks as they are now trading above their 50-day and 200-day moving averages. I would therefore suggest that you go long at the current price of $78.41 at £40 per $1. In that case, I would put the stop loss at $54.41, which gives you a total downside of £960.

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UK equities are having their time in the sun. The FTSE 100 recently hit an all-time high of 9,000, driven by a broad recovery in equity prices. To put it another way, the rally wasn’t just driven by a handful of outperformers. In fact, during the first half of the year, UK equities have done better than their US peers, reversing a decade-long trend of US outperformance. Since the start of 2025, the FTSE All-Share has delivered a total return of just over 9% in local currency terms. In US dollar terms, it produced a total return of 19%, significantly outperforming the S&P 500’s 6%.

According to numbers compiled by the wealth-management giant Schroders, the outperformance has been driven not by earnings growth, but by multiple expansion – a side effect of investors’ confidence improving. Over the first half, Schroders calculated the UK’s total return was driven by a 10% increase in valuation and a 2% return from dividends. Earnings, on the other hand, proved to be a headwind, taking 3% off returns as analysts pushed growth projections lower due to global uncertainty (mainly over tariffs).

UK equities: a growth story

Sentiment counts for a lot in markets and in the UK that has improved dramatically (albeit from a very low base) over the past six to 12 months. It might not seem like it, but the UK has experienced the strongest run of positive economic surprises among developed markets since January. According to Citi’s Economic Surprise Index (once again, from a very low base), sentiment around the UK’s trade-deal “hat trick” with the US, India and the EU seemed to reignite investors’ sentiment about growth. There’s also the tailwind of interest rates. Markets are pricing in several rate cuts by the Bank of England over the remainder of the year and into 2026. Lower rates should support domestic cyclical stocks such as retailers, housebuilders and builders’ merchants. These rate-sensitive sectors should also benefit as Labour’s efforts to drive investment in infrastructure and planning reforms start to yield results.

Despite the market’s strong performance so far this year, investors, particularly those in the UK, are still leaving in droves. According to equity fund flow data compiled by JPMorgan, over the last 12 months, around £32 billion has flowed out of UK equity funds, equivalent to 11.6% of starting assets under management. Investors seem to be selling into the rally, with outflows accelerating over the past few months despite recent market highs.

It might come as a surprise, but on a top-down basis, UK equities are a growth story. Estimates from JPMorgan have earnings per share in the FTSE 100 growing by 11.5% in 2025, before falling back to 2.5% in 2026. Schroder’s Intelligence, on the other hand, has earnings per share growing 3% this year and then 12% in 2026. Whichever way you look at it, that’s projected earnings growth in the mid-teens over the next two years. Based on that, the FTSE 100 is trading at an average forward price-earnings (p/e) ratio of 12. “This represents a 10%-15% discount to their 15-year medians and a substantial discount compared with the US market,” according to JPMorgan.

Dig deeper, and the valuation is even more compelling. “UK mid-caps trade at 12 times expected 2025 earnings, with earnings forecast to grow at around 15% year-on-year, indicating potential good value (a p/e ratio less than the growth rate). There’s potential for a re-rating if domestic growth persists,” the investment bank adds.

UK equities: key risks to avoid

There are compelling reasons to buy UK equities, but there are also plenty of risks to consider. JPMorgan makes it clear that domestic stocks are favoured over international exporters. Over the past four years, industrial energy prices in the UK have risen to the highest levels in the developed world, making it difficult for most producers to compete with their international counterparts. A significant portion of the UK’s industrial base has vanished as a result. It doesn’t look like this environment is going to change anytime soon.

Utilities also look risky due to political interference, high capital spending requirements and generally poor return profiles. Indebted consumer stocks, which will suffer if wage growth stagnates, should also be avoided. The major lingering risk for UK equities is the potential for further tax rises. The Labour government has been floating numerous potential tax hikes in the autumn Budget. With the country’s finances deteriorating and a complete lack of political will to cut spending, additional taxes are almost guaranteed. Additional taxes will have an impact on consumer spending and business activity. Based on the last round of tax hikes, which dented business confidence and squeezed hiring, investors do need to consider this risk on the horizon.

The valuation of UK equities compared with international peers has already led to a wave of takeover offers. As UK investors flee, international investors are seizing the opportunity to swoop in. The value is there, and private equity is capitalising on it. Real estate investment trusts (Reits) have become a particular area of interest. Assura, Urban Logistics, Care Reit and Warehouse Reit have all been acquired this year. Due to an interesting quirk in the law regarding stamp duty, it is often cheaper to purchase property through a company structure than to buy it directly. Shares attract stamp duty at a rate of only 0.5%, while corporate bodies buying certain types of property may face stamp-duty rates in the mid-teens. So, acquirers receive a tax benefit, as well as the opportunity to purchase property at a discount to its market rate. At the beginning of June, there had been more than 30 bids for companies worth more than £100 million, with an average premium of 45% across all sectors.

Aside from the real-estate sector, high-quality UK mid caps and small caps look attractive, trading at historically wide discounts to their US peers and with international revenue footprints. Banks offer dividend yields in the mid single digits with further capital returns likely as profits continue to grow and are still trading at relatively low valuations despite their shares rising to levels not seen since before the financial crisis.

UK equities: go for quality

So where should investors be looking for value? As ever, quality is key. A fascinating study on this topic emerged at the beginning of July in the form of a Panmure Liberum report, “Accounting red flags: high-quality stocks lead”. The research, building on academic studies and machine-learning applications, aims to help investors identify high-quality stocks, avoid corporate failures and enhance returns. The framework focuses on three main areas: accounting quality, audit risk and governance oversight. Companies were categorised into the top 30% (highest accounting quality) and the bottom 30% (lowest accounting quality) baskets (excluding financial and real estate companies due to issues arising from leverage). Over the past five years (ending June 2025), the report found that the top 30% quality basket in the UK outperformed the bottom 30% by an annualised 9%.

After analysing the data on reports from 2024, the analysts compiled a select list of UK equities that they believed met all the criteria they were looking for in terms of companies with the best-quality accounts. The list includes the likes of Associated British Foods, BT Group, DCC, Games Workshop Group, Halma, Mitchells & Butlers, National Grid, J. Sainsbury, SSE, Taylor Wimpey and Whitbread.

UK equities: promising healthcare champions

Panmure Liberum has also dived into the healthcare sector in the UK. Healthcare, biotechnology and pharmaceuticals are all areas of strength in the UK economy. They are among the most significant growth sectors globally, given the ageing population, advancements in medical technology and increasing wealth. Advanced Medical Solutions (LSE: AMS) sits in the sweet spot of UK value and is one of Panmure Liberum’s favourite plays. The company has a portfolio of “medtech” products, mostly developed in-house, focused on the surgical and wound-care markets. It was a small-cap champion and returned more than 1,000% between 2010 and mid-2018. However, the business struggled to grow into its valuation, and the stock is down around 30% over the past five years. Still, Panmure thinks this is the “best rerating story” in the medtech sector and looks “most obviously oversold” when compared with historic ratings. The company has made several strategic missteps over the past five years, which have hindered growth in the US market. Difficulty digesting a recent acquisition has also spooked investors. But while the market struggles to understand the business, private equity is waiting in the wings. A recent approach from Montagu didn’t generate an offer, but it put the company on investors’ radars. Panmure believes a fair price for the company is between 300p and 350p.

The investment bank also thinks animal genetics company Genus (LSE: GNS) is deeply undervalued. The company specialises in using cutting-edge science and technology, including genomics selection and gene editing, to enhance animal breeding. For example, in April, Genus received US regulatory approval for its product designed to provide pigs with resistance to porcine reproductive and respiratory syndrome (PRRS), a disease affecting farmers worldwide. This was a “hugely significant landmark” and is expected to lead to approvals in other jurisdictions. This treatment alone could be worth more than 1,000p per share, but much of the growth isn’t yet reflected in the company’s share price.

A wild card is CVS Group (LSE: CVSG). Investors dumped shares in the group, which owns veterinary practices across the country, when the UK regulator announced an investigation into market and pricing practices in May 2024. As investors have reevaluated their position, the stock has recovered and Panmure sees further upside. It notes that the regulator’s working paper on remedies was “relatively benign”. Initial findings are expected in September 2025, and final recommendations before January/February 2026. If the outcome of the investigation comes out as expected, analysts believe the stock could be worth around 1,600p based on historic profit multiples.

UK equities: mid caps

Berenberg has also highlighted some of the most attractive names in the UK mid-cap sector based on their growth potential. Genus is on their list, as well as electronics retailer Currys (LSE: CURY). At the beginning of the month, the company reported a 37% increase in adjusted profit before tax, along with the return of cash dividends, as the group’s cash balance rose to £180 million net at the end of the year. However, the stock is trading at a forward p/e below ten, which does not seem to consider the company’s growth potential. OSB Group (LSE: OSB) and Paragon Banking (LSE: PAG), two specialist mid-cap lenders, are also on the investment bank’s list of undervalued growth plays. The former is trading on a p/e of 4.8, while the latter is on 7.1 times forward earnings. Both have carved out a niche in the buy-to-let lending market, which, despite negative headlines, is still growing. Paragon recorded a 25% rise in new buy-to-let lending in the first half of its financial year, driven by growing demand from landlords, the firm announced at the beginning of June. OSB has had to deal with internal issues as well over the past few years, but these now seem to be behind the business. A series of updates providing evidence that the firm is delivering in the short-term will “help restore confidence”, noted Panmure in a recent note.

Other mid caps on Berenberg’s radar, all trading on a p/e of ten or less, include Kier Group (LSE: KIE), ITV (LSE: ITV), Mitie (LSE: MTO), Pets at Home (LSE: PETS) and IG Group (LSE: IGG). Kier and Mitie, in particular, are plays on the UK government’s ballooning spending bill; ITV is more of a break-up/ takeover play. IG, with its firm and growing foothold in global financial markets, is a true UK-based global champion, with a substantial growth runway ahead. One company that features on a lot of “best-buy” lists issued by the City’s top brokers is Babcock International (LSE: BAB). The defence firm is one of the major contractors for the UK’s nuclear deterrent, and the shares have more than doubled in value over the past year as the Labour government has reiterated its commitment to defence spending in the UK. The shares started the year at a discounted multiple of just 10.4 times forward earnings. Now, they’re closer to 20 times, which is a bit on the pricey side. That said, defence is a long-run, predictable business, suggesting Babcock deserves a premium valuation. JPMorgan has earnings growing 64% in 2025 and then 8% in 2026, with a 4.2% dividend yield.

Barclays’ favourite mid-cap is 4imprint Group (LSE: FOUR). The firm, which produces promotional products, is one of the investment bank’s top picks in Europe, with a potential upside of 68% to the 5,500p price target and a Barclays “quality” rating of 99%. The quality of the business is determined by its strong net cash balance (£148 million at the end of 2024), free cash flow (£103 million estimated for 2025) and return on capital employed of 77.7% in 2024. Despite these metrics, the stock is trading at an undemanding forward p/e of 12.7, with a prospective dividend yield of 5.1%.

UK equities: the best of the best

There are plenty of London-listed mid caps that look attractive at current valuations, but which ones really deserve a place in your portfolio? 4imprint seems to be one of the City’s top picks. Barclays has it as one of its top plays in Europe, and it’s one of a handful of businesses with net cash on the balance sheet. Berenberg thinks “4imprint’s highly cash-generative model and low appetite” for mergers and acquisitions suggests there is “scope for increased returns to shareholders through special dividends or buybacks”. It also thinks there’s plenty of scope for the group to expand its profit margins through economies of scale and general growth.

Genus is another firm that is universally backed by the City.

Deutsche Bank, Berenberg and Panmure have all flagged the stock as a “buy” following its winning US regulatory approval and due to rising demand for animal proteins. Babcock also has a strong following. It’s those long contract lead times that are really exciting. Berenberg puts it nicely: “Revenue guidance strikes us as conservative given the large pipeline of domestic and international defence contract opportunities, as well as the strong momentum as evidenced by the 11% average annual organic revenue growth achieved in the last three years”.

In the property sector, NewRiver REIT (LSE: NRR) has been flagged as an undervalued recovery play. As an owner of retail parks and shopping centres, NewRiver has faced a challenging few years, but the outlook is now starting to improve. “With rents still affordable and asset values near cyclical lows,” NewRiver’s portfolio is well placed to benefit from the normalisation in investors’ sentiment “and the hunt for high, stable income”, Panmure Liberum’s property team notes. The 9.1% dividend yield is fully covered and the company is trading at a 36% discount to the value of its net assets – appealing as bidders circle the sector.

Finally, there’s Mr Kipling owner Premier Food (LSE: PFD). This company has risen, like a phoenix from the ashes, over the past five years. Coming out of the pandemic, the group was overleveraged, burdened by onerous pension obligations and struggling to control a bloated cost base. It soon got costs under control, but debt and pensions remained an issue. In the past three years, it’s been able to draw a line under the pension issues and make a dent in the debt. It’s used the cash to reinvest in the business, reinstate the dividend, and is now looking for acquisition deals. After a strong few years, analysts weren’t expecting much in the way of excitement this year. They were wrong. A recent trading update beat low expectations and management reaffirmed profit expectations for the year. Growth will be driven by progress in new products and recent acquisitions. Both Shore Capital and Berenberg analysts tip the stock. It trades on a forward p/e of 13, compared with the peer group average of 17.

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Murray International Trust is a globally diversified investment trust aiming to deliver an attractive and growing income, alongside long-term capital growth. By investing in companies with sustainable and rising cash flows, the fund avoids overexposure to low-yielding stocks, making it a distinctive complement to more growth-focused global funds.

Recognised as a “dividend hero” by the Association of Investment Companies (AIC), Murray International has increased its dividend for 20 consecutive years. It is managed by an experienced team at Aberdeen who have worked together for over two decades and is supported by researchers posted to key developed and emerging markets, helping to uncover high-quality opportunities wherever they arise.

Global stocks banking on growth

Intesa Sanpaolo (Milan: ISP), Italy’s biggest domestic bank, offers a wide range of services across retail, corporate and investment banking; wealth management and insurance. The management has delivered strong operational efficiency, with a cost-to-income ratio of 38% in the first quarter of 2025 – among the lowest levels in Europe.

A strategic focus on higher-return, higher-growth areas, such as wealth and savings, bodes well. Management has repeatedly raised guidance and remains optimistic, with falling interest rates providing a supportive backdrop. We initiated a position in early April, taking advantage of fears of a global recession and market weakness around “Liberation Day”. The stock has since performed well, but we continue to view it as a quality compounder. Its robust capital position, moreover, supports a premium 7% dividend yield, further adding to its appeal.

Diageo (LSE: DGE) is a leading UK-based alcoholic beverages company and one of the world’s largest producers of spirits, with a portfolio of iconic brands, including Johnnie Walker, Talisker, Smirnoff, Tanqueray, Don Julio, Casamigos and Guinness. Since 2022, the company has faced multiple challenges: excessive inventory, operational mis-steps, weaker demand from consumers, the threat of rising tariffs and shifting drinking habits, all of which led to a halving of the share price following a post-Covid boom.

There has been much debate about whether these headwinds are structural or cyclical in nature, alongside scrutiny of the management team. After careful consideration, we added to the trust’s holding. While further patience may be required, we believe Diageo’s global presence, strong brand and breadth, together with its ability to innovate, will deliver long-term value.

Infosys (Mumbai: INFY) is a global IT services and consulting company with headquarters in India. It offers services such as cloud computing; AI and automation; data analytics; cybersecurity; and digital transformation across industries, including finance, healthcare, retail and manufacturing.

The share price has underperformed this year as macroeconomic uncertainty has prompted clients to delay discretionary projects. But the management team recently confirmed that the pipeline for cost-reduction programmes remains robust, and this is an area of expertise for Infosys. We see real potential in the company’s expansion into AI-related services and believe the current share price presents an attractive entry point for long-term investors.

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These are tough times for big retailers. They are beset by the cost of living, uncertainty about the global economy and rising staff costs, especially after the recent increase in employers’ national-insurance contributions. However, some well-run retailers have managed to rise above the turbulence.

One of these is Dunelm Group (LSE: DNLM), which we successfully tipped three years ago in issue 1114, selling in issue 1152 for a profit of £789. This proved to be a wise decision, as for the next two years the stock largely trod water. Lately, however, it has started to take off, so this is a good time to consider another punt.

Dunelm sells home furnishings, ranging from furniture and garden equipment to bedding. Over the past few years, it has demonstrated a knack for finding products that people are interested in buying and pricing them at levels that are affordable, without discounting them too heavily.

While it has consistently grown the number of stores that it operates, it has balanced this expansion with investment in its website, allowing it to benefit from consumers’ gradual move online. More recently, it has tried to offset the rise in national insurance payments by boosting the number of self-service checkouts and by working hard to improve efficiency.

Dunelm's rivals will struggle to match up

The upshot is that Dunelm has prospered as others have stumbled, increasing its market share to 7.7%. Sales have increased more than 50% over the past five years, and the latest figures suggest they are still on the rise. While the entrance of the US retailer Pottery Barn into the UK market is a potential threat, the new arrival will take some time to establish itself, and Dunelm’s efficiency and recognisable brand should help it rise to the challenge. At the same time, Dunelm’s purchase nine months ago of Irish retailer Home Focus provides scope for expansion, as well as making it less dependent on the UK market.

Dunelm boasts solid operating margins and an excellent return on capital employed, which has consistently been greater than 40%. It also has relatively low levels of debt, which should sustain it even if consumer confidence suddenly declines. The stock still looks very attractive, however, trading at a modest 14.6 times 2026 earnings. Even better, it offers a dividend yield of 5.5%, which is much higher than the average of 3.6% for the FTSE 350 as a whole.

Dunelm’s shares also have plenty of momentum behind them. They are trading above their 50-day and 200-day moving averages and have outperformed the market over the past three, six and 12 months, with several brokers recently upgrading their price forecasts. I therefore suggest that you go long at the current price of 1,169p at £2 per 1p. In that case, I would put the stop loss of 769p, which gives you a total downside of 800p.

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Those who dislike luxury stocks cite similar criticisms to those who dislike the clothes many of them make. They are too expensive, fashionable one minute and out of style the next. For European investors, however, they are difficult to ignore. Some of Europe’s most valuable companies are luxury giants – and recent challenges have taken a chunk out of share prices.

The last few years have been a roller-coaster for the sector. In 2020, the personal luxury goods market dropped by 22% as the pandemic struck. It then rebounded by 29% in 2021, as pent-up demand was released and households went on a shopping spree with their excess savings. The following two years saw incredible growth rates: 21% and 10% respectively. For context, the sector’s organic annual growth rate is typically 6% per year.

This “insane rate of growth” laid the foundations for the challenges the sector is now facing, according to Flavio Cereda, who manages the luxury brands strategy at GAM Investment Management. “How do you grow? Price, volume, mix,” he says. “There wasn’t a lot of mix during those three years (2021-2023). It was mostly price and volume with some brands guilty of excessive price increases and, in some cases, probably excessive volumes.”

The situation was not sustainable. Last year, the sector was pretty much flat as a result, but experts believe it will normalise. Cereda thinks it could have achieved 4%-5% growth in 2025 if it weren’t for Trump’s tariffs. Given the situation in the US, he is now expecting 1% growth this year, followed by a return to mid-single-digit growth in 2026. This raises the question: is now a good time to invest?

Tighter (designer) purse strings

These are difficult times for luxury goods companies. Global growth is expected to slow to 2.9% in 2025 and 2026, according to the latest forecast from the OECD think tank – the lowest level since the pandemic. Tariffs, tighter financial conditions and weaker business and consumer confidence are all to blame. It is hardly likely to prompt consumers to hit the shops.

High-net-worth consumers are fairly resilient; they are the last to be hit by economic volatility and the first to emerge from it. However, aspirational customers account for around half of luxury sales, according to a 2024 report from McKinsey. They will feel the effects of an economic downturn more sharply.

The industry hasn’t helped itself. Bernstein’s analysis shows that luxury brands raised prices by an average 36% between 2020 and 2023, pricing some consumers out of the market entirely. Tariffs will push costs even higher, although there are limits to how much some brands will be able to pass on. Luxury giant LVMH recently indicated it could increase prices by 2%-3% per year without affecting demand, but added that this would be more difficult among lower-priced beauty and alcohol items. If companies have to absorb some of the costs themselves, their margins will be squeezed.

Ultra-luxury brands seem less concerned. Hermès’s chief executive Axel Dumas recently told investors that US customers would “understand and remain loyal” in the face of price hikes. “Those who find it too expensive will come to benefit from our hotel infrastructure in Paris,” he added. “I regret this, but I’m not particularly worried.” Dumas is right that the luxury consumer is fairly mobile. Jelena Sokolova, luxury stocks analyst at Morningstar, says around 30% of luxury purchases are made while people travel.

This route is less of an option for aspirational shoppers, though, and it doesn’t negate the fact that tariffs are likely to weaken the broader economy. Even if they can afford luxury items, households are less likely to go shopping when markets are down and the economy is struggling.

Challenges in China

Luxury goods might be made in Europe, but their fate is sealed in China – and events there are taking a toll, too. Chinese sales drove 40% of the sector’s growth between 2019 and 2023, according to a report from McKinsey. For context, US sales accounted for around 30% of growth, and European sales around 10%. The Chinese economy is facing some challenges, including a property market slump and high youth unemployment. As a result, Chinese shoppers aren’t buying as much as they once did. Luxury consumers in the region are very wealthy, Cereda says, but challenges in the real estate and equity markets have created “the perception of being less wealthy”. It is a confidence issue.

Against a tough economic backdrop, Chinese consumers are becoming “patient, rational shoppers”, says Bloomberg’s Shuli Ren. She compares the shift in China to what happened in Japan after the economic bubble burst in the early 1990s. Shoppers are taking more of a mix-and-match approach as designer items are paired with high-street alternatives. Social media influencers are teaching their followers “how to dress like the Japanese, who look a million bucks but without a lot of money in the bank”, says Ren.

Economic challenges in China are a problem right now, but Cereda doesn’t think the issue is structural. “The money is there,” he says. “The question is whether Chinese consumers are willing to spend that money if they feel uncertain about the future.” Over the longer term, he is confident that China’s consumer will continue to be a driver of luxury growth.

The knock-on effect on luxury goods sales

The Chinese slowdown has translated into lower sales for several key players in the sector. Take LVMH. Sales in Asia (excluding Japan) dropped 11% in the first quarter of 2025, contributing to a 3% decline in total revenues. On an earnings call, chief financial officer Cécile Cabanis said the figure reflected “continued soft demand” in the region. Look at Gucci’s owner Kering, and you will see something similar. Retail sales in the Asia-Pacific region fell 25% in the first quarter, contributing to a 14% drop in group revenue.

Not all luxury brands are behaving in the same way though. Hermès, most famous for its exclusive handbags, saw sales increase by 1% in Asia ex-Japan in the first quarter. This contributed to overall sales growth of 7% across all regions. While both growth rates slowed compared with previous quarters, the company remains one of a few outliers in the sector that has shown resilience in the face of the Chinese slump.

Prada also grew its retail sales in the Asia-Pacific region by 10% in the first quarter, contributing to 13% growth across all regions. Miu Miu has been a big growth engine for the company, with global sales rising 60% on an annual basis. “Miu Miu in China is insane. It’s off the charts. So consumers are still shopping. They’re buying a whole lot of stuff. It’s just more difficult now as a luxury brand. You have to resonate,” Cereda says.

Today’s environment is creating a “stark” divergence between “leading and lagging” brands, according to Natasha Ebtehadj, co-manager of the Artemis Leading Consumer Brands Fund. She points to Kering and LVMH as two examples that are facing challenges. Kering has faced execution problems, while LVMH has pushed hard on pricing. Both have aspirational shoppers as part of their customer base, making price hikes more difficult to pass on.

On the other end of the spectrum, ultra-luxury brands such as Hermès are faring better. Supply is limited and demand remains strong. At the top end of the market, “spending trends remain stable”, Ebtehadj says. “The meaning of a true luxury brand is starting to shine through here.”

Hermès’s strong brand control has also helped support its performance. Looking to buy an iconic Birkin or Kelly bag? Good luck. Stores used to have waiting lists that could be years long, but these have now been scrapped. This means the best route is to build a long-standing relationship with the sales team in a Hermès store. The supply-demand imbalance means products like this command astonishing prices. If you purchase directly from Hermès, you will pay anywhere from $10,000 for a classic leather Birkin to more than $200,000 for a crocodile and diamond-encrusted version, according to Sotheby’s. You can get your hands on one more quickly by buying at auction, but it could mean shelling out even more cold hard cash.

The exclusivity of the brand means Hermès’s customers are willing to cough up large sums of money for products. Despite this, the company hasn’t used this as an excuse to hike prices exponentially. The price of a Birkin bag has risen by about 29% since 2016, according to figures cited in The Economist. A Chanel quilted bag has more than doubled in the same period.

Luxury stocks: where to invest

One advantage of recent challenges is that valuations look more appealing. LVMH (Paris: MC) is one example. It is currently trading at around €450, below Morningstar’s fair-value estimate of €620. Markets have been disappointed by the company’s sluggish growth rates recently, but this is only when compared with the strength of post-Covid growth. “If you think about the quality of the business, it is still the number-one brand in luxury with the biggest resources to spend on marketing, real estate and everything else,” says Sokolova. “I think it should weather this crisis quite well eventually.”

Kering (Paris: KER) is another example, says Sokolova. The stock is trading at around €180, below Morningstar’s fair-value estimate of €360. The firm has faced challenges including poor sales at its flagship brand Gucci, but the market might have gone too far, pricing in an underperformance that surely will not last.

If you want a stock that can weather uncertainty, stick to the higher end of the luxury market. With a price/earnings ratio of 51 times, Hermès (Paris: RMS) is expensive, but it could be worth paying up for given its record of delivering sales growth against a tough backdrop. “There is essentially more demand than the company can supply, which has led to indisputable pricing power and predictable earnings growth that usually beats expectations in almost any economic environment,” says Ebtehadj.

Alternatively, a luxury fund is a good option for those who prefer to leave their stock picking to a professional. The GAM Luxury Brands Equity Fund is one example. It is actively managed and has exposure to 25-35 luxury companies globally. Annualised returns exceed 7% on a one and three-year basis, and 9% on a five-year basis. The Amundi S&P Global Luxury UCITS ETF is a passive alternative for those who are happy to track the market rather than beat it. It comes with lower fees at 0.25%.

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B&M used to be one of the stars of the London stock market. The discount chain was founded in Lancashire in the 1970s and expanded rapidly throughout the UK with its cheap and cheerful mix of bargains for the home and the kitchen. The shares hit more than 650p back in 2021, more than doubling over the previous five years as the brand became better known. Over the last year, however, the share price has slumped by more than 40%. Last week, it reported annual profits were down by 13%, and while it managed to increase overall sales slightly, that was only by opening 70 new stores; its like-for-like sales were down by 3% over the last 12 months. The shares fell another 10% on the news.

Its rival, Poundland, is not doing any better. The chain has already been put up for sale by its Polish owners, and it has been reported to be planning a restructuring that would see store closures and rent reductions imposed on landlords. Likewise, Wilko, which operated in a similar part of the retail market, has now gone under. Add it up, and one point is clear. The chains that specialised in selling you some cheap tea towels, a huge bar of chocolate, or a phone charger for a pound or less are all struggling.

In many ways, that is surprising. After all, with a cost-of-living crisis, you might expect the discount shops to be booming. Taxes are rising relentlessly, meaning that people have less money to spend, and they will almost certainly go up even more in the autumn. The economy has stalled, with growth not expected to go above 1% this year. There is little sign of fresh investment, and while the minimum wage has gone up by more than inflation, most people are still struggling to make ends meet. Against that backdrop, you would expect the bargain retailers to boom, while the chains at the posher end of the market would struggle. Instead, with the likes of Marks & Spencer doing well (at least until a cyberattack hit sales), it appears to be the other way around.

Budget chains in a brutal battle for survival

There are two big problems. Firstly, the budget chains have been hit the hardest by the steep rises in costs imposed by the Labour government. The rise in employers’ national insurance and the lowering of the threshold at which it has to be paid, kicks in regardless of whether a company makes any profits. Likewise, business rates don’t take any account of what kind of products you are selling or for how much. The discount chains, with wafer-thin profit margins, are inevitably hardest hit. Also, the living wage kicks in regardless of whether you are selling a £1,000 handbag or a £1 packet of washing powder. So while costs have risen across the board for all retailers, it is far easier for chains at the top end of the market to absorb them than for the chains at the bottom. That is wiping out what little profit they might once have been able to make.

Secondly, the squeeze on living standards is hitting the lower-paid. A pampered public sector is doing very well, with record pay rises, and with an increasing number of jobs, while professional white-collar workers are at least maintaining their living standards. As the payroll data published this week made clear, it is lower-paid work that is taking the hit. A total of 274,000 jobs have been lost since the Budget, with the biggest losses in sectors such as bars and restaurants, and in retailing and motor repair, while public administration, education and healthcare have all grown. The people who have lost their jobs were the customers for the discount chains, and while they may still have benefits, if they no longer have a job, they inevitably have less money to spend than ever before.

The cheaper end of the market has become a brutal battle for survival. The pound shops were always a tough place to make money. It required lots of attention to detail, a genuine feel for what people wanted to buy, savvy negotiating skills to source the lowest-cost supplies from around the world, and a ferocious focus on efficiency to keep prices as low as possible. If you could get all of those things right, it was possible to make money. All that has now changed. The British economy is now in such terrible shape that even the pound shops can’t make any money any more – that is not likely to change any time soon.

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Frasers Group isn’t the kind of company that wins awards for corporate governance or sustainability. It’s not the darling of environmental, social and governance (ESG)- focused funds, nor does it feature heavily in the portfolios of institutional investors.

Its majority owner, Mike Ashley, is a lightning rod for controversy – a maverick who seems to thrive on defying convention. Yet, beneath the headlines and the market’s disdain, Frasers Group has quietly compounded its book value per share at an impressive rate annually since listing in 2007.

At today’s share price, this retail empire looks dirt cheap. For contrarian investors willing to stomach some volatility, Frasers Group might just be a great opportunity.

Mike Ashley: a maverick at the helm of Frasers Group

The company’s story begins with Mike Ashley. He founded Sports Direct in 1982 with a single store in Maidenhead, armed with little more than a £10,000 loan from his family and a knack for spotting a bargain.

Fast forward four decades, and that single store has morphed into Frasers Group, a sprawling retail conglomerate valued in the billions of pounds. Ashley, now 60, remains the majority shareholder with a 73% stake, giving him near-total control over the company.

Ashley’s journey hasn’t been without turbulence. His tenure has been marked by a string of controversies that have made him a polarising figure in British business.

In 2016, a parliamentary inquiry into working conditions at Sports Direct’s Shirebrook warehouse exposed zero-hour contracts, below-minimum-wage payments, and a culture that allegedly penalised workers for taking breaks. Headlines screamed of “Victorian” work practices, and the share price took a battering.

More recently, in 2020, tax officials considered investigating Frasers Group over furlough payments during the pandemic, raising the spectre of millions being clawed back by the Treasury.

Ashley’s combative style hasn’t helped; he’s clashed with everyone from MPs to shareholders to the City establishment, often dismissing critics with a bluntness that borders on disdain.

Yet for all the noise, Ashley’s record speaks for itself. Since Frasers Group listed on the London Stock Exchange in 2007 as Sports Direct International, it has transformed from a single-brand sportswear retailer into a diversified retail powerhouse. It now owns a portfolio of brands spanning House of Fraser, Flannels, Jack Wills, and Game, alongside its core Sports Direct business.

Ashley’s strategy – buying distressed retail assets on the cheap, stripping out costs, and turning them around – has proved effective. House of Fraser, acquired for £90 million in 2018 after it fell into administration, is a case in point. By 2024, the department-store chain was contributing to group profits, a feat few thought possible when he bought it.

Frasers Group’s unconventional approach extends beyond Ashley’s leadership style. The company is a poor fit for the ESG criteria that dominate modern investing.

On the environmental front, its reliance on fast fashion through brands such as Sports Direct and Jack Wills raises red flags. The retail sector is under increasing scrutiny for its carbon footprint and waste, and Frasers Group has been slow to adopt the sustainability initiatives that peers such as H&M or Next trumpet in their annual reports.

Socially, the group’s history of labour controversies continues to haunt it. While working conditions have reportedly improved since the 2016 scandal, the stain on its reputation lingers.

Why Frasers Group has been shunned by ESG investors

Governance, however, is where Frasers Group faces its most significant criticism. Ashley’s majority ownership means he effectively runs the show, leaving little room for independent oversight.

This alone is enough to make ESG-focused funds recoil, but the issues run deeper. Related-party transactions, a long-standing concern for shareholders, have repeatedly raised questions about conflicts of interest.

Ashley has a history of involving family members and close associates in the company’s dealings, often in ways that blur the lines between personal and corporate interests.

Frasers Group insists these transactions are conducted at arm’s length, but critics argue they undermine governance standards and prioritise Ashley’s personal network over shareholders.

These related-party dealings have drawn scrutiny from regulators and investors alike. The company has since improved its reporting, but the perception of cronyism persists.

For ESG-focused investors, this is a dealbreaker – governance scores for Frasers Group consistently rank in the bottom quartile of the FTSE 100, according to data from MSCI.

The lack of independent board oversight, combined with Ashley’s history of related-party transactions, makes the company a pariah in the eyes of ESG investors.

This has consequences. Frasers Group is little owned by professional investors, particularly the passive funds that have come to dominate global markets. In a world where ESG compliance increasingly dictates capital flows, companies such as Frasers Group are often overlooked.

Data from the London Stock Exchange shows that institutional ownership of Frasers Group is below 10%, compared with an average of 60% for FTSE 100 companies. Active fund managers, too, have shied away, wary of the headline risk and governance concerns.

The result is a stock that, despite its large size, trades in relative obscurity, ignored by the very investors who might otherwise bid up its price.

Frasers’ business model is as unconventional as its owner, yet its success is undeniable. Ashley has built the company on a foundation of opportunistic acquisitions and ruthless cost-cutting, a strategy that has allowed it to thrive in a retail sector littered with casualties.

Debenhams, Topshop and Arcadia are just a few of the high-street names that have collapsed in recent years, yet Frasers Group has not only survived but grown.

Since 2007, the company has expanded its store count from 400 to more than 1,500, with a presence in 20 countries.

Revenue has climbed from £1.3 billion in 2007 to £5.6 billion in 2024, and operating profits have risen from £150 million to £650 million over the same period.

The secret to this growth lies in Ashley’s ability to spot value where others see only risk. It involves snapping up struggling retailers at bargain prices, integrating them into the Frasers’ system, and leveraging the group’s scale to drive efficiencies.

This has allowed the group to diversify its portfolio, reducing its reliance on the sportswear market.

Today, Sports Direct accounts for just 50% of group revenue, down from 90% at the time of listing. Premium brands such as Flannels, which cater to a wealthier demographic, have become key drivers of growth.

Ashley’s unconventional tactics extend to operations. Frasers Group is known for its aggressive negotiating with suppliers, often securing discounts that competitors are unable to secure.

The company also invests heavily in its physical stores, bucking the trend of online-only retail. While peers such as Asos focus on e-commerce, Frasers has doubled down on experiential retail, transforming flagship stores into destinations with features such as in-store gyms and gaming zones. This strategy has paid off, with footfall in the group’s stores rising even as high-street visits declined overall.

Despite its operational success, Frasers Group’s share price tells a different story. As of March 2025, the stock trades at similar levels to 2012, despite continued earnings growth.

This is a steep discount to other listed retailers. The valuation gap is particularly striking given the company’s growth record. Since listing in 2007, Frasers Group has compounded its book value per share at a compound annual growth rate of 16%, which sums to a 13-fold increase in the last 18 years.

That’s an extraordinary achievement for a retailer operating in a sector known for thin margins and fierce competition. Over the same period, however, the share price has barely tripled.

The stock’s low valuation reflects the market’s unease with Ashley’s governance and the company’s ESG shortcomings, but for contrarian investors, this disconnect between price and fundamentals is precisely the opportunity.

An exemplary contrarian play

Frasers Group’s combination of a cheap valuation, strong growth and limited institutional ownership makes it a classic contrarian play. The market’s disdain for Ashley and his unconventional approach has created a valuation anomaly; a firm that consistently delivers double-digit growth trading at a paltry valuation. For investors willing to look past the headlines, the potential rewards are significant. Consider the numbers. If Frasers Group continues to compound book value at 16% annually, its book value per share will reach more than £8 by 2030. Even if the market continues to assign a conservative price-to-book ratio of 1.5, the share price could still be double its current level. The valuation is at historically low levels, and any rise will significantly boost shareholders’ returns.

Frasers Group may be controversial and overlooked by professional investors, but a straightforward analysis reveals a business that thrives through operational excellence and disciplined capital allocation.

Beneath the noise, Frasers runs a tight, profit-generating ship with a clear and consistent investment philosophy. At the core of its strategy is a tiered system of resource allocation, prioritising long-term value creation.

The first and foremost focus is on driving growth and efficiency within its existing operations. This involves investing in store refurbishments, logistics, technology, and brand development; moves that directly enhance customers’ experience and operational performance.

Frasers also takes an opportunistic approach to external investments. It deploys cash to acquire stakes in other businesses or to snap up properties at attractive, often distressed, prices. This contrarian, bargain-hunting mindset has allowed Frasers to pick up valuable assets on the cheap, strengthening its market position while competitors hesitate.

Once these internal and external investment opportunities have been exhausted, Frasers directs capital towards initiatives that offer mutual benefits with its commercial partners. These strategic partnerships often create synergies that boost both Frasers’ and its partners’ profitability, expanding the company’s influence across the retail sector.

Finally, Frasers prioritises returning excess capital to shareholders through aggressive share buybacks. This shareholder-friendly policy has been particularly effective: over the past seven years, the firm has repurchased and cancelled roughly 20% of its outstanding shares. This has enhanced value per share by around 25%, rewarding long-term investors with a larger slice of the company’s growing profits.

No contrarian bet is without risks, and Frasers has its share of challenges. Economic headwinds, such as slowing disposable incomes in the UK, could affect consumer spending, particularly in the budget segment where Sports Direct operates.

The retail sector remains fiercely competitive, with online players like Shein and Temu posing a growing threat to Frasers Group’s low-price model.

Frasers Group is not a stock for the fainthearted. But for those willing to embrace the contrarian case, the opportunity is compelling. A 13-fold increase in book value since 2007, a dirt-cheap valuation, and a business model that has proved its resilience make Frasers Group a rare gem in a battered retail sector. Brave investors may find themselves richly rewarded.

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Tesco’s CEO has warned of a “mounting price war among UK supermarkets”, with conditions in the sector becoming “very competitive”, says Isabella Fish in The Times. The country’s largest grocer is to “double down on cost cuts” in addition to lowering its profit forecast by up to £400 million for the year, from £3.1 billion to between £2.7 billion and £3 billion. The move comes after Asda recently pledged to “deliver its biggest round of price cuts in a quarter-century”, a move that has already wiped billions off competitors’ market values.

No wonder Asda has decided to cut prices, says Hannah Boland in The Telegraph. It needs to do something to “stop the rot”. Its market share has dropped from 14.8% to 12.6% in the last four years alone, with overall sales “slipping”. This represents an “existential” problem for a company “lumbering” under a £3.8 billion debt pile following a £6.8 billion takeover in 2021 by private equity firm TDR Capital. Viewed in this context, the price cuts seem to be an attempt to return to the “tried and tested strategy” that was credited with “fuelling a major upswing at Asda in the 1990s”.

Can Tesco keep up with its rivals?

It’s good news that Asda’s decision to try to win back some market share by lowering prices has “spooked” rivals such as Tesco, who are now “running scared”, says James Moore in The Independent. After all, it’s only fair that investors are now feeling a little pressure, given that Tesco has been “lining [its] pockets with gold”, with £864 million spent on dividends as well as another £1 billion on buying back shares. These numbers “tell you all you need to know” about who has been winning the “battle” between retailers and their customers, so “it is about time the scales tipped back” towards the latter.

Price cuts may be “good news” for consumers, but it’s important not to overstate the threat they pose to Tesco, says Ian King on Sky News. While Tesco and Sainsbury’s have the “most to lose” from a turnaround at Asda, they are also “better placed than anyone else to withstand one”. Tesco’s Clubcard is “arguably the world’s most successful supermarket loyalty and rewards scheme”, providing the grocer with “data and insights no one else has, enabling it to react fast to changes in the market or to shoppers’ habits”.

Tesco has certainly shown that it is capable of matching rivals on price in the past, including the German “interloper” Aldi, says Alex Brummer in the Daily Mail. But the prospects of a price war between the major supermarkets that could hit profits isn’t the only reason why Tesco’s investors “aren’t terribly happy”. Its share price is also suffering from fears that consumer confidence is dwindling, while the £235 million hit to income from the national insurance increase and the impacts from the Employment Rights Bill are “still to be felt”. Nevertheless, the overall sector is less vulnerable than many think: “even in recession people want to eat well”.

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Some new carpets might have made a difference, or perhaps an updated stock range, some slicker-looking shops, and a fresh advertising campaign. Instead, the new owner of WH Smith, one of the oldest retailers on the British high street, have opted for one of the oldest tricks in the corporate playbook. It is changing the name. WH Smith will now be known as TG Jones. The trouble is that it’s hard to see that making much difference.

WH Smith is selling off its 480 high street shops to Modella Capital, a retail investment firm, for £76 million, and will focus purely on its travel unit, operating in airports and train stations around the world. That looks like a tacit admission that the only place to make money in Britain is from people getting out of the country – but it is hard to dispute the logic.

WH Smith plans to focus on what works

The travel business has been expanding rapidly, selling last-minute bottles of water, snacks and books in the departure lounge, while the high-street shops have been struggling to remain profitable. Without the albatross of the British high street, WH Smith will be free to focus on the healthy parts of the business and get rid of the often very tired stores in provincial and market towns selling an odd collection of books, stationery and snacks. With a share price that has fallen by 20% over the last year, it needed to do something.

Still, it is hard to see how it makes any sense for the buyers, or for the shops that are left behind. The marketing consultants are probably feeling pleased with themselves for coming up with perhaps the only name that is as dull as “Smith”. But it’s hard to escape the feeling that the high-street business will fade away, joining the likes of Woolworths and Dixons as brands that have long since vanished from the major shopping centres.

There are three big problems. First, WH Smith was fading anyway. The over-50s might have nostalgic memories of when it was a gateway to the world on a provincial high street. It sold music, back when vinyl was still a thing, alongside a huge range of magazines and books. Before the internet, it was often the only place you could find out about what was happening elsewhere. Likewise, its stationery was where you picked out a new pencil case before school restarted for the year.

But sentiment aside, the market has moved on. Newspapers and magazines have been in steep decline. The book industry has been turned upside down by the Kindle. Plenty of people still buy physical books, but Waterstones has expanded, and has a far better offer than Smith’s does. People still need stationery, but there are plenty of places you can buy that. In many ways, it is surprising Smith’s is still around, given how much the market has changed over the last 20 years.

TG who?

Second, the brand change will confuse customers. Smith’s has endured despite the decline in its core market because it still has such a well-known brand. TG Jones, however, won’t have any brand at all. No one has ever heard of it, and, given that it does not sell a very exciting range of products, they won’t be very interested in finding out what it is there for.

Finally, it will distract management from improving the shops. It was always going to be tough for Smith’s to thrive when it faced so many challenges. However, competitors such as Waterstones, The Works and Card Factory have done far better in similar markets. The old management was far more interested in the travel unit and neglected the high-street shops. The new team will be devoted to establishing a completely different brand. It is hard to see that they will have the time or money for anything else. The legacy of the brand was about the only thing keeping the chain alive. The harsh truth is that TG Jones will struggle even more than WH Smith did – and it may not be around for very much longer.

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Few names resonate on the British high street quite like Greggs (LSE: GRG). From its origins as a modest Newcastle bakery to its status as a national institution, Greggs has built a reputation for affordable, reliable fare that has underpinned decades of steady progress.

It stands as a rare success in a retail sector often marked by upheaval. Yet the past year has brought a sharp reversal: the share price has fallen nearly 50%, prompting questions about whether Greggs’ winning streak has faltered. The evidence suggests otherwise.

A brief history of Greggs: a retail success story

Greggs traces its origins to 1939, when John Gregg, a Tyneside entrepreneur, started delivering bread and cakes by bicycle around Newcastle. It was an unassuming venture, born in an era of austerity before World War II, but one that planted the seeds for enduring success. After the war, Gregg opened his first shop in Gosforth in 1951. This small step marked the start of a journey that would see Greggs evolve from being a local baker to becoming a household name. In 1964, John died at just 54, and his then 25-year-old son Ian assumed control, steering the business toward broader horizons.

The pivotal moment came in 1984 when Greggs listed on the London Stock Exchange, which provided the capital to fuel expansion. This wasn’t a leap into the unknown but a calculated move rooted in its practical ethos. What ensued was a textbook case of disciplined growth. While other retailers chased fleeting trends or overstretched their resources, Greggs focused on its core offering: affordable baked goods, delivered swiftly, in locations where footfall was assured.

By the 1990s, it had become a high-street staple across the UK, with the sausage roll emerging as its signature product – simple, satisfying, and budget-friendly. Its rise mirrored Britain’s changing retail landscape, thriving amid the decline of traditional grocers and the rise of convenience culture.

Today, Greggs operates more than 2,500 outlets, outnumbering competitors such as Pret A Manger and even McDonald’s in the UK. It has transcended its roots to become a cultural fixture, serving everyone from workers seeking a quick bite to students in need of comfort food. This reliability has been central to its achievements, reflecting a deep understanding of its customers’ needs. Greggs has tapped into the British psyche, offering not just food but a sense of familiarity and value that resonates across generations and regions.

For investors, consistency is a prized attribute, and Greggs has delivered it in spades. Over the past two decades, revenue has grown steadily, rising from £457 million in 2003 to more than £2 billion in 2024 – a compound annual growth rate of approximately 7%. This is not the stuff of dramatic headlines, but it reflects a robust foundation. This stability has weathered economic storms, from the 2008 financial crisis to more recent inflationary challenges. Operating profits have kept pace, with margins typically ranging between 7% and 10%, a respectable figure for a food retailer navigating supermarket competition and cost pressures.

The dividend history reinforces this stability. Greggs has maintained payouts since the early 2000s, with only a brief interruption during the Covid pandemic when high-street traffic vanished. It swiftly recovered, resuming dividends in 2021 and supplementing them with special payments when cash reserves allowed, including payouts of 40p per share in both 2021 and 2023. For income-focused investors, Greggs has been a dependable performer, often yielding above 3% and currently over 3.5%, supported by a business model that avoids reckless ventures. This prudence has kept it afloat where flashier rivals have floundered.

Greggs has a straightforward, but effective strategy

Greggs has thrived by sticking to its strengths: good-value products tailored to its audience. While competitors experimented with premium offerings, Greggs stuck to its guns. The result? Total shareholder returns over the last 20 years of more than 1,000%. Greggs’ expansion has been deliberate rather than dazzling. It rests on three key elements: increasing its store network, refining operations and adapting to shifting tastes. The outlet count has grown incrementally – 260 when listing on the stock market in 1984, 1,000 in 1999, 1,500 by 2010, 2,000 by 2019 – and each new site has been strategically placed in high-traffic areas such as stations, retail parks and town centres. The strategy is straightforward but effective.

Operationally, Greggs has bolstered its infrastructure. Centralised bakeries and efficient logistics enable it to produce millions of items weekly with precision, a feat honed over decades. In 2023, a new frozen logistics hub in Derby, along with other major investments, enhanced capacity to support an additional 500 stores, signalling a commitment to future growth. This is part of a long-term plan to ensure supply matches demand as the chain grows.

Product evolution has been subtle but effective. The 2019 launch of the vegan sausage roll tapped into the rising demand for plant-based options without alienating its traditional base, driving a surge in sales. The addition of pizza broadened its appeal. Coffee, too, has become a strength, being affordable and competitive with chains such as Costa. These adjustments have sustained growth, with like-for-like sales rising 13.7% in 2023 despite economic headwinds and 5.5% in 2024, proving Greggs can adapt without losing its identity.

Success on this scale requires capable leadership, and Greggs’ management has proved its mettle. Roger Whiteside, CEO from 2013 to 2022, was an important and successful steward of the company, accelerating store openings and championing innovations such as the vegan range while maintaining cost discipline. His successor, Roisin Currie, took over in 2022, having joined the business in 2010 as chief people officer following a 20-year career at Asda. The leadership team’s pragmatic approach is evident in the financials. Return on capital employed (ROCE) has averaged 15%-20% over the past decade, reflecting efficient use of resources. Debt is negligible – net cash was £125 million at the end of 2024 – and cash flow comfortably covers dividends and capital expenditure. This is a management focused on execution, not fanfare.

So why are the shares languishing?

Given this strong record, the near-50% drop in Greggs’ share price over the past year – from nearly 3,200p in March 2024 to a little over half that – demands scrutiny. The decline stems not from internal failings but from a confluence of external pressures and market sentiment. The cost-of-living crisis has intensified, with inflation peaking at 11.1% in late 2022 and lingering at 3%-4% into 2025. For Greggs’ core demographic of working-class consumers, stagnant wages have curbed spending, denting footfall. Like-for-like sales growth slowed to 5% in the first half of 2024, down from double-digit gains in 2023, unsettling investors accustomed to stronger momentum.

Rising costs have compounded the issue. Wheat, energy and labour prices have climbed steeply. Greggs has raised prices modestly but hesitates to push further. Margins slipped in recent years, and although there are signs of improvements, concerns about cost impacts, particularly on wages, persist. Broader market dynamics have also played a role. With interest rates holding at 4.5% and anxiety about recession persisting, consumer stocks have fallen out of favour. The FTSE 250 has declined 10% over the past year, but Greggs’ drop has been steeper, exacerbated by a premium valuation – more than 25 times earnings at its peak, compared with a historical range of 15-20.

Management remains composed. Currie has acknowledged the difficulties, but Greggs continues to press ahead with expansion, achieving a net increase of 145 stores in 2024 – bringing the total to 2,554 – and targeting around 100 net additional openings in 2025. Digital channels have also seen strong growth, with app-based sales rising by 20%. The evening trade, particularly pizza offerings, has emerged as the most significant contributor to recent rises in sales, now accounting for a notable portion of revenue.

Operational excellence remains a priority, too, with ongoing investments in cost-saving initiatives designed to offset inflationary pressures. These efforts include enhancements to supply-chain efficiency and automation. Yet this focus on long-term stability has unsettled a market often fixated on short-term gains. Investments in new stores and efficiency measures are expected to exert modest pressure on margins and reduce return on capital in the near term. Despite this, Greggs’ consistent delivery of its strategic objectives over the years suggests that the current weakness in the share price may not fully reflect the underlying strength and health of the business.

Why patient investors should buy now

Over the years, Greggs has repeatedly demonstrated an ability to find new growth opportunities. This has delivered value to shareholders, with management’s disciplined capital allocation driving consistently high returns on investment. Greggs’ core fundamentals also remain robust. Sales continue to rise, profits have proved resilient, and the balance sheet is in good shape, supported by a healthy net cash position. Recent share price weakness appears to reflect short-term challenges rather than any structural issues with the business model. At current levels, the stock looks cheap, trading on a valuation multiple below both its decade-long average and much of its peer group. The 3.6% yield, backed by strong cash reserves, adds to the appeal.

Looking ahead, economic conditions should ease. Inflation is easing and, while interest rates may remain elevated in the near term, they are expected to soften by late 2025. Greggs’ value-focused offering tends to resonate particularly well in lean times, making it well positioned to benefit from any lingering caution among consumers. Meanwhile, ongoing store expansion, alongside growing digital and delivery channels, should continue to fuel growth. If the economic backdrop improves, profitability could also receive a boost as cost pressures ease. Risks persist, of course. A deeper-than-expected downturn or renewed spike in input costs could hinder the recovery. But Greggs has weathered challenging periods before, including the global financial crisis of 2008 and, more recently, Covid lockdowns in 2020. On each occasion, the company emerged stronger, having demonstrated both operational resilience and an ability to adapt.

For patient investors, the current share-price pullback offers an appealing entry point into a proven performer. With a runway for further growth, robust fundamentals and an attractive valuation, Greggs’ high street success story is far from over. Its ability to balance tradition with innovation, coupled with a relentless focus on value, ensures it remains a formidable presence – one that could reward those willing to look beyond the present gloom.

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Next has joined Tesco, Marks & Spencer and B&Q’s owner Kingfisher by achieving at least £1 billion in yearly profits, becoming only the fourth UK retailer to do so, says Harry Wise in This is Money.

Pre-tax profits climbed 10.1% to £1.01 billion in the year to 26 January 2025 thanks to strong e-commerce sales. However, the firm urged investors “to keep a level head”, saying it would be “a big mistake to view the company differently just because it has passed any milestone... profits can go down as well as up”.

Next’s low-key reaction to passing the £1 billion mark is just what you’d expect from a business led by Simon Wolfson, who has a reputation for “under-promising and over-delivering”, says Alistair Osborne in The Times. Still, he’s confident enough to begin the year “with a rare upgrade to profits guidance”, upping his forecasts by £20 million to £1.07 billion, despite worries about the impact that a rise in National Insurance will have on both sales and margins. The main reason for this is that Wolfson “no longer expects a 5% or so like-for-like drop in store sales as business moves online”.

Can Next maintain the momentum?

Rival retailers “struggling” with the impact of National Insurance increases and consumers who are “more careful with their money” will be eager to learn just how Next has put together its “secret sauce”, says eToro’s Adam Vettese.

The key has been an early recognition of the importance of multiple distribution channels, especially online sales, which allowed it to diversify away from being a “traditional high-street stalwart”.

However, Next needs to find a way to “maintain the momentum”: M&S and Tesco, the previous two members of the billion club, went on “very different trajectories” following their milestones.

It’s hard to see Next suffering the fate of M&S and Kingfisher, “whose profits collapsed shortly after they hit the [£1 billion] mark”, says Aoife Morgan in the Retail Gazette.

While the company is arguably “nearing the top end of its potential in the UK”, its “rapidly expanding e-commerce platform” makes further international growth the next obvious move.

Next is already selling in India under its licensing and franchise agreement with Myntra, as well as through Nordstrom in the US. It is “hoping to grow a presence in Japan, China and South Korea”. It also benefits from “more stable and better management” than either Kingfisher or M&S had.

Wolfson is “unlikely to sacrifice future investment in order to maintain the £1 billion level, or become more profligate in his spending”, says Bloomberg’s Andrea Felsted, while Next’s international plans may enable it to weather any domestic turbulence. However, investors still need to prepare “for the day Wolfson decides to hang up his shopkeeper’s apron”.

After all, M&S’s decline in the late 1990s started with a “brutal” succession battle.

More broadly, it is an “uncomfortable” truth that “when a long-serving and successful leader bows out, a period in the wilderness follows”.

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4Imprint (LSE: FOUR) is a direct marketer of promotional products in the US, Canada, UK and Ireland with an extensive product range. It is worth £1.55bn. North America accounts for 98% of sales. Innovative marketing and excellent customer service allow the company to introduce millions of customers to tens of thousands of customised products.

Typical products include banners and giveaways for trade shows, personalised bags, lanyards, mugs, clothing (T-shirts, hats, jackets), umbrellas, pens, notebooks, personalised sticker rolls, desk ware, USB drives, phone chargers and tins of goodies (sweets, mints, popcorn). Products are often from well-known brands but 4Imprint has developed several in-house brands to fill specific gaps within categories such as bags, drinkware and notebooks.

The promotional products market is very fragmented but 4Imprint has gained market share over the years and is now thought to be the leader, with more than 5% of a fragmented North American sector estimated at $26bn. That illustrates the company’s potential for further growth through market share gains. Its excellent customer service and delivery promise have helped it flourish. For example, if the customer finds within 30 days that they could obtain the products more cheaply elsewhere, 4Imprint will refund double the price difference. Furthermore, free samples or artwork are provided to prospective customers who can place orders either online or by phone.

Most orders are “drop-shipped” directly to customers from suppliers and this helps speed up delivery. It also means that 4Imprint carries low inventory, which gives it a high return on capital, a key gauge of profitability, of around 82%.

Why 4Imprint is gaining popularity

4Imprint has more than 1.1 million monthly online visits, many more than its major competitors such as discountmugs.com with 260,000 visits. The group’s marketing strategy includes customer retention campaigns; digital marketing using search engine optimisation (SEO), accounting for about half of all its website visits; and paid digital advertising and TV advertising (typically 10,000 airings per month).

4Imprint has a diverse set of customers, ranging from most Fortune 500 companies to family businesses and spanning government organisations, churches and schools, major universities and hospitals. Promotional products are used for sales and marketing campaigns, recruitment activities, employee recognition programmes, and health and safety initiatives. 4Imprint regards individuals placing orders as its primary customers rather than their organisations. Targeting these order placers is proving effective – 75% of all 2023 orders were from existing customers.

CEO Kevin Lyons-Tarr was promoted internally to group CEO in 2015. Sales grew from $49m in 2002 to $1.33bn in 2023, a compound annual growth rate of 16.9%. This growth has been almost entirely organic. There was an inevitable dip in sales in 2020 and 2021 owing to the pandemic, but by 2022 sales were up to $1.14bn, compared with $0.86bn in 2019. 4Imprint is a capital-light business that achieved a relatively high operating profit margin of 10.3% in 2023.

A North American promotional products industry body noted that the promotional products market was essentially flat in the first half of 2024. This reflected economic caution because of the US Federal Reserve’s decision not to cut interest rates in the first half, fears of a potential recession and ongoing geopolitical instability. 4Imprint’s 5% revenue growth for the first half compared with the same period in 2023 therefore represented gains in market share.

Buy 4Imprint to ride the US rebound

4Imprint’s 2023 results showed orders up 12% from 2022, revenue up 16% to $1.33bn, operating profit up 32% to $136.2m and pre-tax profit up 36% to $140.7m. The balance sheet on 31 December 2023 showed net cash of $104.5m, up 20.4%. The dividend was raised by 34% to $2.15 per share.

The interim results for the first half of 2024 were released in August and showed revenue up 5% to $667.5m, which given the flat promotional-products market means 4Imprint gained market share.

Operating profit was up 10% to $69.9m and pre-tax profit was up 11% to $73m. Net cash on 30 June was up 63% year on year to $121.5m. Total orders in the first half were up 3.6%, while 145,000 new customers were acquired.

A trading statement on 12 November confirmed that full-year group profit at just over $150m would meet analysts’ forecasts, with revenue expected to hit $1.37bn. Net cash on 31 October was $137m. Total order value was 4% above the same period in 2023.

The company has grown dividends strongly since 2019, with the 2023 dividend totalling more than ten times the 20.5p paid in 2019. But no dividend was paid in 2020, showing that 4Imprint will not sacrifice growth initiatives or cash balances in hard times.

Expenditure on promotional products is partly discretionary for many organisations, so the market tends to be flat or shrinking in difficult economic times. However, the International Monetary Fund predicts US GDP growth of 2.8% in 2024 and 2.2% in 2025. Reuters expects interest rates to reach between 3% and 3.25% by the end of 2025.

Given this outlook and 4Imprint’s proven ability to take market share, 4Imprint should enjoy further expansion. Net cash of $137m, a forward dividend yield of 3.6% and a forward price/earnings (p/e) ratio of 15.3 make this a sensible entry point to await the upturn.

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Food giant Nestlé has been left “counting the cost” of pushing up prices of its most popular brands beyond the reach of “increasingly squeezed customers”, says Sian Bradley in The Times. It has been forced to cut its sales guidance again.

Underlying sales increased by an unexpectedly weak 2% in the first nine months of this year, which means that it now expects sales to rise by only 2% over the full year, “the lowest rate since the turn of the century”. Experts have blamed the malaise on Nestlé’s decision “not to ease up quickly enough on price increases” as inflation has cooled, as many of its competitors did.

Nestlé’s poor numbers explain why former CEO Mark Schneider was ousted in August, says Aimee Donnellan for Breakingviews. It’s not just the poor sales figures. The company’s profitability “is also under pressure”, with margins weakening. While this could be fixed by a “hefty spend on sales and marketing”, possibly funded by selling some of its 20% stake in the beauty giant L’Oréal, the company also faces the medium- and long-term challenge that its portfolio “is full of foods that may go out of fashion” amid growing concern over rising rates of obesity.

How are Nestlé shares performing?

The “tumbling targets” follow trouble with IT last year and an “uncomfortable regulatory investigation” in France over allegations related to the purification of bottled mineral water, says Miles Costello in The Telegraph. As a result, Nestlé’s shares are down 14% in a year and close to their cheapest valuation in 10 years, at 18.4 times forward earnings.

But the group still has some “distinct competitive advantages”, including the “distribution clout created by its scale”, buying power with suppliers, and “diverse household-name brands that underpin pricing power”. Even concerns about health need to be seen in the context of the firm’s “increasing emphasis on health and nutrition”. The “ingredients exist for success”.

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Dr Martens’ shares have slumped by 85% since listing three years ago. Are they now cheap, or could there be more pain ahead for investors? In 2011, after 50 years in control, the owners of Dr Martens, the Griggs family, put the business up for sale. At first, they couldn’t find a buyer willing to pay the price they were asking. But eventually, in 2013, a deal was struck with private equity firm Permira for £300 million. 

The takeover was for the assets of R Griggs & Co., the firm that manufactured and distributed the shoes, and for the right in perpetuity to use the Dr Martens brand. The actual ownership of the brand was retained by the Griggs family. In the year before the deal, the company generated £22.6 million in pre-tax profits on £126 million in revenue. 

Permira owned the business for the following seven years before listing it on the London Stock Exchange in 2021. During its period of ownership, Permira expanded the company, with a fivefold increase in the number of stores worldwide and a twelvefold rise in online sales. In total, the seven-year ownership led to a tripling in revenues coupled with a quadrupling in pretax profits before the initial public offering (IPO). 

The firm, bought for £300 million in 2013, attracted a valuation of £3.7 billion in 2021. This included net debt of £250 million, so the enterprise value at the time of listing was close to £4 billion. Since floating, however, the shares have fallen considerably. Sales continued to rise for a time, but profits fell and even revenue now seems to be falling. Did a private equity firm really engineer such a jump in the value of the business, or was the supposed creation of value illusory?

Is Dr Martens in decline?

The firm has blamed industry-wide softening of demand for boots, particularly in the important US market. The trend was exacerbated by falling sales via the internet – an area that was previously an engine for growth. The hope among management and investors is that there is a secular growth trend in place and that the business is going through a soft period. However, Dr Martens is a fashion brand, which is ultimately driven by the popularity of its footwear. 

Fashion is cyclical; trends come and go. It is difficult to predict what brand or product will become fashionable ahead of time, but once it is becoming fashionable, the trajectory becomes entirely predictable as yesterday’s cool becomes tomorrow’s uncool. Whether through luck, judgement or a degree of well-timed investment in the brand, Permira’s purchase of the business coincided with Dr Martens’ footwear emerging from a long period of being considered unfashionable. From 2018 to late 2021, Google searches for the brand rose consistently, although its popularity was particularly pronounced in winter when people buy more boots. 

In 2021 the tide turned, a fact easily inferred from Google Trends data, which is showing sequentially lower peaks in winter and lower troughs in summer. Moreover, fashion wanes with ubiquity and the inevitable consequence of a huge increase in sales is that there are a lot more people wearing the products. Things don’t become unfashionable overnight. It can take several seasons before something goes from being cool to becoming uncool, but once the process begins, it can be difficult to reverse. Dr Martens is in decline. 

The consequences of becoming unfashionable are twofold. First, people buy far fewer products since the offering becomes just another pair of boots, which reduces sales volumes. Second, and potentially far more damaging, buyers become more motivated by the price than the style or brand. These less fashion-conscious shoppers are far more interested in the value of the product and are willing to shop for bargains or buy cheaper alternatives. This leaves a company with downward pressure on pricing and, with it, further falls in sales. As a result, when a previously fashionable brand is waning, sales can fall quickly. In these cases, operational gearing can be severe, so that a relatively small drop in sales can quickly wipe out any profits. 

The most bullish scenario now is that this is indeed a temporary dip and the brand is on an upward trajectory of ever-greater popularity and sales. More likely, however, is that the brand is about to enter a prolonged period of being less fashionable, which could last for a decade or two, and the current value of the shares reflects that possibility. The group has an enterprise value of £1 billion. It holds £400 million in debt and other financial liabilities. The cost of servicing those liabilities is more than £30 million per year. Under a best-case scenario, the increase in sales outlets is indicative of an increase in sustainable sales. With the additional debt servicing, this would most probably leave the company able to generate £75 million or so in pre-tax profits and £55 million of net income. Applying a modest valuation of 12 times earnings would imply a value slightly below the current share price. 

However, this might prove optimistic. A more pessimistic view would be that 11 years ago, the brand was unfashionable and worth £300 million, and it is becoming unfashionable again. Adjusting for inflation, £300 million in 2013 is £400 million today. A possible outcome, then, is that as the brand becomes less sought after, its value falls below the level of its debt. In this case, the shares are worthless and before long a highly dilutive rights issue is a possibility.

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For most of the 1990s, Topshop ruled the high street. Under the management of the combative Philip Green, or at least of his senior staff, it pioneered cheap, fast fashion, bringing style and panache to clothes that everyone could afford. It formed partnerships with the likes of Kate Moss and Beyoncé, and its flagship store on Oxford Street covered five floors. At its peak, it was inescapable. After Green’s Arcadia Group went into administration, however, it was sold to its online rival Asos, and the stores were closed down. 

It might be about to make a return. Last week, Asos sold a £135 million stake in the business to Heartland, controlled by the Danish retailer Anders Povlsen, who also owns brands such as Jack & Jones and Vero Moda. There are plans to reboot the website and the company says it will explore opening physical stores again. If all goes to plan, there could be a Topshop on every high street once again, bringing a much-needed dash of colour to the increasingly drab parade of charity and betting shops that dominate many town centres.

Will Topshop be resuscitated?

It is a lovely idea, and it would be great if it happened. In its heyday, Topshop was a great British success story, even if its achievements were often overshadowed by Green’s larger-than-life persona. But, sadly, it is very hard to see it making a comeback. The reality is that it is impossible to revive even the greatest retail brands once they have disappeared from the retail centres. 

Over the last couple of decades, plenty of people have tried and failed to bring retail brands back from the dead. Woolworths was one of the best-loved chains on the high street, and after it went out of business in the wake of the financial crisis of 2008 and 2009, there have been various attempts to bring it back to life. The most recent is by the German owner of the name, where the brand is still trading. 

But none of them have managed to get the brand anywhere close to its former glories. Likewise, the owners of the electrical chain Comet tried a comeback in 2020, but it got nowhere. Laura Ashley has never managed to return to anything like its peak, even under its current owner, Next. We have not seen the return of C&A, or British Home Stores, or Rumbelows, even though they were all huge chains back in the day. The list goes on and on. There are hardly any retail chains that have managed to make a significant revival once they have gone under.

Why do retail chains fail to make a comeback?

There are two reasons for that. First, the high street moves on, especially in fashion. The teenage girls who made up the core market for Topshop have found other places to shop, buying their fast fashion from Boohoo or Shein, or shopping for vintage clothes on the increasingly popular second-hand websites. To a 16-year-old, a brand that closed down five years ago means nothing, and one that was big in the 1990s might as well come from the Roman Empire for all it means today. Once a chain closes down, rivals move in and offer the same products in a different format. Indeed, the reason the chain closed was probably because its customers already found it tired and irrelevant, and disappearing for five or 10 years is not likely to have fixed that. If anything it will have made it worse. 

Next, brand loyalty in retailing is far weaker than executives and investors think it is. Most shops are successful because they are in the right place, they manage to embody a certain look or lifestyle and they find a way to sell at competitive prices and still make a profit. It is a difficult combination to get right. It is the product that customers are mainly interested in, not the place where they happen to be buying it, whether it is a new pair of jeans or a TV. Once they get used to buying somewhere else, it is hard to persuade them to go back. 

The blunt reality is that reviving a dead brand is not a sustainable business model. The chains that once dominated the high street went under for a reason. Once a chain closes, the game is up. There is no way back, and there is no point in investors wasting a lot of money trying to prove that there is.

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Shares in Japan’s Seven & i Holdings, which operates 7-Eleven convenience stores worldwide, have risen after it said it was “open to discussions” with Canada’s Alimentation Couche-Tard if the latter improves its $39 billion takeover bid, say P.R. Venkat and Megumi Fujikawa in The Wall Street Journal. Seven & i rejected Couche-Tard’s previous offer last week on the grounds that its proposal “significantly underestimated the company’s value and potential”. This has led to speculation that Couche-Tard will raise its offer, although there may be antitrust concerns over any deal as both firms have large networks in the US. 

Competition will certainly be a “key consideration” in any deal, says Lex in the Financial Times. A merger “would create a global convenience-store leader with more than 100,000 stores”. US regulators will definitely want to become involved. Given 7-Eleven’s operations in the US, both in terms of its own stores and the franchises of other brands that it runs, the combined entity would be America’s “biggest convenience-store operator”. What’s more, because the deal would be the largest foreign takeover of a Japanese firm, Japanese authorities will also be under pressure to scrutinise it. 

Is a takeover likely? 

For a company such as Seven & i to consider selling itself “would have been unthinkable a little over a decade ago”, says The Economist. Japan’s listed firms “have long been known for their hostility to takeovers and their lack of responsiveness to shareholders’ demands”. However, this is “slowly changing” thanks to reforms to corporate governance. Combined with the decline in corporate cross-holdings, which have traditionally been used to fend off hostile takeovers, this means that listed Japanese firms “can no longer simply dismiss takeover attempts out of hand”. 

Opponents of the deal, meanwhile, have a point when they argue that 7-Eleven has “more value than simply its worth to shareholders”, says Bloomberg’s Gearoid Reidy. While not quite a “critical piece of national infrastructure”, 7-Eleven stores provide a “vital local hub in Japanese communities, particularly in rural areas”, with the chain’s “nationwide reach and economy of scale” making its “tasty, nutritious food options available to otherwise isolated elderly people”. Japan’s “often-undervalued brands” should keep such factors in mind when deciding whether to sell up.

In any case, for this deal to present a “real test” of Japan’s receptiveness to foreign acquisitions, Alimentation Couche-Tard “needs to work a lot harder” to come up with a more attractive offer, says Anshuman Daga on Breakingviews. The offer is not only below the level that Seven & i’s share price was trading at as recently as February, but also far short of the ¥3,500 per share break-up value the Japanese chain could command. Any new proposal will also need to include a “large break fee” to compensate for the “extended deal timeline” necessary to allow for a proper regulatory investigation.

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For many income funds, the consumer staples sector has been a happy hunting ground when it comes to finding companies delivering consistent and growing income. The sector benefits from widely recognised brands that encourage regular purchases from loyal consumers, so these stocks tend to be relatively defensive during economic slowdowns. 

Many companies also have excellent records of income growth over several economic cycles. Amid all the hype and interest in artificial intelligence (AI), the sector has derated against the broader market despite its companies delivering resilient growth in earnings and cash flow. Here we highlight three stocks that we think offer attractive long-term opportunities.

Three consumer staples stocks to consider

1. PepsiCo (Nasdaq: PEP) is best known for its beverages, with brands including Pepsi, Mountain Dew and Gatorade, making it the dominant market player alongside Coca-Cola. However, the jewel in its crown is the snacking division, Frito-Lay, whose brands include Lay’s and Doritos. PepsiCo enjoys a market share of almost 40% in the savoury snack category and has seen consistent organic growth over a number of years. Importantly, this is a more profitable part of the business, generating close to half of Pepsi’s overall earnings despite accounting for less than a third of the company’s revenues. Pepsi is also expanding further beyond the US, where there is ample scope for growth given the relative underpenetration of its brands and snacks in general. The company is a so-called Dividend Aristocrat, having increased its dividend every year for more than 50 years. It currently yields over 3%. 

2. Unilever (LSE: ULVR) has been in business for nearly a century. It started out selling soap and margarine but is now a global powerhouse with leading brands across categories such as personal care, home care, nutrition and beauty. Despite being listed in Europe, the company enjoys high exposure to faster-growing countries such as India. Around 60% of the group’s overall revenues stem from emerging markets. Unilever’s beauty division, Unilever Prestige, has also been a strong growth driver in recent years, notching up 13 successive quarters of volume growth, with brands such as Dermalogica and Paula’s Choice leading the way. The company offers a robust dividend yield of just over 3% per annum, firmly underpinned by strong cash-flow generation and a healthy balance sheet.

3. Procter & Gamble (NYSE: PG) was founded in 1837 and is one of the world’s largest consumer goods companies. It boasts market-leading brands across a number of categories, including Pampers, Tide, Head & Shoulders and Oral-B. Innovation has been a key part of P&G’s success, driven by its industry-leading expenditure on research and development, which helps to secure further gains in market share. One recent example would be Tide, the laundry brand. P&G released a version of the detergent in the form of a tile that uses microfibres to create layers of soap, reducing the need for the liquid and fillers normally found in laundry capsules. The tiles offer superior cleaning power and ease of use at lower wash temperatures. P&G has paid dividends for well over 100 years and has raised its payout every year for more than the past 60, making it another Dividend Aristocrat.

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I’ve often thought about switching careers to be a dermatologist - apologies to those who I have lectured about the daily benefits of sunscreen. 

I remain committed as a financial journalist, and I can't help wondering if investors are missing out on opportunities that may come with so-called cosmetic stocks - dubbed lipstick stocks?

As many lipstick users will tell you, there’s always money for lipstick. Lipstick is known to be recession proof and in fact, the so-called lipstick index can be used to determine the economic health of a country when lipstick sales go up but consumers rein in their spending elsewhere.

In 2018, the value of the cosmetics market worldwide was $508bn, reaching $676bn in 2023. It is projected to total $716bn by the end of 2024 and then $758bn by the end of 2025, data site Statista shows. 

There’s no denying, it’s growing. We’ve all seen the queues of children piling themselves into Space NK or Sephora to buy premium skincare products or make-up, spending hundreds of pounds. And you know it's extreme when threads ranting about the ridiculous queues of children start appearing on Mumsnet. 

Those with daughters may be nodding in agreement.

Should you buy cosmetic stocks?

I do not have a daughter, but if I did, I'd certainly be buying stocks in some of her favourite brands rather than spending the money just buying products.

Consumer behaviour is a good indication of how well a company will do - in other words, if you want to know which stock to buy (a question I am often asked), then the answer is close to home - where are you spending your money?

If you’re pouring hundreds into a brand, why not own some of it?

We see patterns over and over again. Apple is the perfect example - when everyone rushed out to buy the latest iPhone, the smart consumer purchased the stock first.

According to Nasdaq, someone who put $1,000 in Apple in 2012,  would have $9,298 in 2022. Read more about Apple on our article - Where will Apple be in 5 years?

I’m not suggesting cosmetic stocks are heading the same way at the same speed, and in fact beauty stocks have seen a dip. But, in a future where new Space NKs and Sephoras are popping up at shopping malls, with preppy teens, frustrated parents and TikTok users lining up daily, you could say the dip is a blip and cosmetics stocks may well help your portfolio glow.

Here are some cosmetic and beauty stocks and funds worth considering.

Is L'Oréal worth it? 

Let’s start here with the fact that the richest woman in the world is Francoise Bettencourt Meyers, who has the largest stake in L'Oréal (LSE: 0NZM), one-third of which she inherited from her mother. She is the first woman ever to hit a $100bn fortune. 

In L'Oréal's latest annual report, the beauty brand reported a year of double-digit growth in 2023. 

CEO Nicolas Hieronimus said the brand was optimistic about the outlook for the beauty market and looking into the future, it will have beauty tech at its very core to fuel further growth.

“Beauty tech will shape our industry and enable us to further strengthen our leadership. It will allow us to know our consumers ever-better, to bring them ever-more impactful and sustainable products and services and to become ever-sharper in our execution,” he said in the company’s annual results.

L'Oréal shares were introduced on the Paris Stock Market on 8 October 1963 and over a period of 5 years, the stock has seen a 61.57% increase.

The stock has also received support from FundSmith’s Terry Smith who told The Telegraph in March he thought L'Oréal was one of the best companies in the world and described L'Oréal as a leading cosmetic company with healthy returns on capital, strong profit margins and revenue growth as well as a strong ESG strategy.

Smith also cites L'Oréal’s distribution in China, which has been better than other cosmetic companies.

L'Oréal is one of the top-10 holdings in the Fundsmith Equity Fund, which is also one of the most purchased funds by private investors each month. It is also cited as one of the 'granola stocks' driving the European equity markets.

Ulta Beauty

Ulta Beauty (NASDAQ: ULTA) is the largest beauty retailer in the US with over 1,385 stores across 50 states.

While the stock took a dip in the first half of the year, down -16.98% in the last six months, it has gone up 10.69% over five years.

In its latest annual report, Ulta Beauty reported net sales increased 9.8% to $11.2 billion, and comparable sales increased 5.7% compared to fiscal 2022.

Its operating profit increased 2.4% to $1.7bn, or 15% of sales, and diluted earnings per share increased 8.4% to $26.03. 

CEO David Kimbell said: “The US beauty category has a strong track record of consistent growth due to a high level of consumer engagement. Since the end of the pandemic, the beauty category has experienced unprecedented growth, driven by compelling newness and innovation, evolving trends, including a stronger connection between beauty and wellness, and the pervasive utilization of social media.”

Kimbell said he was “optimistic about the strength and resiliency of the beauty category”.

“While we expect the category will remain healthy, we believe annual growth will moderate in 2024 as we lap three years of extraordinary growth.”

Estée Lauder

While Fundsmith’s Terry Smith has favoured L’Oreal over Estée Lauder (NYSE: EL) after he sold his stake in the company following a lack of growth in China, it can be argued the brand is making waves in India and shouldn’t be dismissed just yet. The recent wedding of Anant Ambani, son of the richest man in Asia, is also fuelling interest in India - see our article on Anant Ambani's net worth.

Estée Lauder's recent collaboration with Indian designer Sabyasachi for limited edition lipsticks has taken the brand to a wider audience. And this week, the brand introduced the second edition of Beauty&You in partnership with beauty retailer Nykaa to help discover, spotlight and propel the next generation of entrepreneurs.

“With a higher degree of consumer awareness than ever and an influx of options unlike anything that the market has seen, India represents an exciting opportunity for the global beauty ecosystem,” Shana Randhava, senior vice president, new incubation ventures at Estée Lauder, said.

Estée Lauder’s stock has struggled, down 46.8% - but is it posed for growth?

Forbes estimates Estee Lauder’s valuation to be $155 per share, reflecting around a 20% upside from its current levels of $130. The forecast is based on four times forward sales, aligning with the stock’s average over the last two years.

Amundi S&P Global Luxury UCITS ETF

If you want some exposure to a range of luxury-good companies rather than individual shares, the Amundi S&P Global Luxury UCITS ETF (Milan: GLUX) is worth a look. It holds around 80 luxury-goods stocks from the US and Europe.

It aims to track the S&P Global Luxury index. Its top holding is currently Hermes International, best known for leather bags and specifically the investable Birkin - but it is also popular for Hermes Beauty, with lipsticks that every handbag wants.  

Over the last five years, the ETF is up 55.5%. 

Marks & Spencer, JD Sports and Sainsbury's are under pressure to increase the hourly wage of their lowest-paid workers in order to “protect living standards”.

ShareAction, which campaigns for responsible investment, said it plans to attend the annual general meetings (AGMs) of the three major retailers this week to confront and challenge them over low pay. 

Tesco, Greggs, Next and B&Q owner Kingfisher were targeted by ShareAction earlier this year.

The pressure group wants the retailers to pay their staff the ‘real living wage’ rather than the government’s legal living wage, which is currently £11.44 an hour. The Living Wage Foundation calculates the real living wage to be £12 an hour nationally and £13.15 in London.

Marks & Spencer will face questions at its shareholder meeting on Tuesday about why it has not yet committed to paying its third-party contracted staff, including cleaners and security guards, the real living wage despite making profits of £380 million last year.

‘Inadequate pay a widespread issue’

Dan Howard, head of good work at ShareAction, told the PA news agency: "Inadequate pay is a widespread issue in the retail sector, leaving many workers struggling to make ends meet, and with all sorts of negative knock-on effects on businesses from high turnover rates to low productivity.

"It's in these businesses' interests to pay their staff a real living wage, which allows workers to afford the basic goods and services they need, from housing to food to bills.”

The activists will also challenge the boards of JD Sports and Sainsbury's at their AGMs on Thursday. The protest comes as Simon Roberts, Sainsbury's chief executive, is set to receive almost £5 million in pay this year, more than 200 times the earnings of the average employee at the supermarket chain.

Catherine Howarth, chief executive at ShareAction, says: "The cost-of-living crisis has made it clear that pay inequality and in-work poverty are a blight on our society and urgently need tackling.”

Sainsbury's said it pays colleagues the real living wage nationally and in London, adding that the vast majority of third-party contractors who work in stores, depots, contact centres and store support centres are already paid at or above the wage. 

According to results published on Tuesday morning, sales at the supermarket overall were up 3% in the 16 weeks to 22 June, but this was slower than in the previous quarter.

An M&S spokesperson said: "This year we made our biggest ever investment in retail pay - £89 million - to at least £12 per hour, in line with the real living wage, as well as investing in improved maternity and paternity policies."

While M&S has not always been a top stock for investors, its latest profit spike suggest it could be making a comeback.

Profits at Marks & Spencer have surged almost 60% but the retailer says it will continue to cut costs in order to “reshape” the company.

The group said underlying pre-tax profits had jumped to £716.4m for the year to March 30, with food sales rising by 13% over the same period. The company added that it ended the year in “the strongest financial health since 1997”.

The profit rise comes after Marks & Spencer returned to the FTSE 100 index of Britain's biggest listed companies for the first time in four years in August last year after a sharp increase in its share price. M&S was one of the FTSE 100’s founding members.

The company’s share price rose to a six-year high on the back of Wednesday’s results. Stuart Machin, chief executive of M&S, said: “We are becoming more relevant, to more people, more of the time.”

He added that two years into its plan to “reshape for growth” the company had seen the beginnings of a new M&S. “Food and clothing and home grew volume and value share ahead of the market, and sales increased across stores and online. Both businesses have now delivered 12 consecutive quarters of sales growth and this trading momentum gives us wind in our sails, and confidence that our plan is working,” Machin said.

M&S on a cost-cutting drive

The retailer said it was also raising its cost-cutting target by another £100m to £500m by 2027-28 as it looks to offset rising staff wages. "With continuing cost headwinds, notably from investment in colleague pay, the structural cost programme is critical to our profit progression," the company said.

M&S has come a long way from the depths of the pandemic, when it cut its coveted dividend and had to renegotiate its overdraft facility with banks to give it more breathing space. In some respects, the pandemic was a wake-up call. While M&S had to close its larger stores selling so-called non-essentials, such as clothing and homewares, it was allowed to keep its food halls open to the public. Meanwhile, sales of non-essentials online boomed.

It has doubled down on its higher-end food offering, betting that consumers will pay extra for high-quality food while also investing in its clothing. Rather than taking its market share for granted or flailing about trying to capture part of the next big trend, it has reinforced its market share in areas in which it is well established, such as food, clothing and physical stores.

Pre-Christmas shopping boom

The strategy is certainly paying off. Despite all the talk of economic hardship, recession and a cost-of-living crisis, 22 December 2023 was the firm's best pre-Christmas food shopping day in its 140-year history.

In its results published on Wednesday morning the group added that profitability at its Ocado Retail joint venture was "well below” the expectations of the original business plan but that it was working closely with Ocado to "reset the business".

Machin said: “It has been a good year, and I would like to thank all of our colleagues for their hard work and commitment. However, there remains much work to do and that’s a good thing as every challenge is an opportunity for growth.”

Supermarkets are an essential part of daily life. Who among us can manage without bread, milk, eggs, and the occasional packet of jam doughnuts? 

Based on this, you might think UK supermarket stocks are a safe buy for your SIPP or your stocks and shares ISA – but the reality is more complex than it first seems. 

Our demand for basic food items is relatively inelastic, but that doesn’t mean supermarkets can sit back and rake in the profits. While prices have risen dramatically in recent years thanks to high inflation, a 2023 inquiry into profiteering accusations revealed supermarkets haven’t been stoking the fire in the manner originally suggested.

The truth is that they operate on tight margins in a fiercely competitive environment – one where they can quickly be priced out of the market if they don’t get their product prices right. This intense competition is good news for the consumer, but makes for a more volatile investment opportunity. 

You only need to look at the major supermarkets’ share prices to see that it hasn’t all been smooth sailing in the post-2008 environment. That’s largely down to the entry of big discounters like Lidl and Aldi (both privately-owned), which have disrupted the traditional supermarket scene. 

Against this backdrop, we look at the investment case for the three big listed UK supermarkets – Tesco, Sainsbury’s and Marks & Spencer. Should you add British supermarket stocks to your investment portfolio, or are they better avoided? 

Traditional supermarkets battle Lidl and Aldi for market share

If you look at the share price history of the listed UK supermarkets, you will see that none of them have ever recovered their pre-2008 valuations. A big reason for that is the growth in popularity of Lidl and Aldi. 

The German discounters first arrived in the UK in the 1990s, but have grown enormously in popularity over the past decade and a half. They now have a combined market share of 18.1%, according to data from Kantar World Panel. 

This has hit Morrisons and Asda the hardest, according to Russ Mould, investment director at AJ Bell. He points out that both companies are “saddled with debt after their respective takeovers”. 

Mould adds that Tesco and Sainsbury’s are holding their own when it comes to market share, but suggests this doesn’t negate the impact the German discounters have had on their margins. He says: “Their margins are not expanding and remain in the low single digits, [revealing] how competitive this business really is.”

Changing consumer habits have also created a more challenging environment for traditional supermarkets over the past decade. The UK has seen a shift away from the big weekly shop, as households instead opt for shopping little and often. 

This change in behaviour means consumers are more likely to visit several stores over the course of a week, shopping around for their favourite products and the best deals. The cost-of-living crisis has only accelerated this trend, as highlighted by a recent research report from the House of Commons Library. 

The report writes that “46% of adults in Great Britain reported an increase in their cost of living in March 2024 compared to a month earlier”, with 89% pointing to increased food prices as the main reason for this. It adds that 49% were shopping around more as a result, while 38% were spending less on food shopping and essentials. 

While inflation has now returned to 2%, prices remain high and households are still battling higher rents and mortgage repayments. The cost-of-living crisis is far from over, and the trend of shopping around is likely to stay. 

Have UK supermarket stocks delivered decent investor returns?

Nevertheless, it isn’t all bad news. We’re now just over halfway through the year, and Tesco and Marks & Spencer have posted decent returns so far in 2024. 

Both stocks are up by around 5% year-to-date, broadly in line with the overall FTSE 100. Tesco paid a full-year dividend of 12.10p (a yield of 3.93%). Meanwhile, Marks & Spencer’s 3p dividend represents a yield of 1.03%. 

There are other sectors in the FTSE that are offering higher returns – see our piece on the best and worst performers. But if the two supermarkets achieve similar growth in the second half, it will be a pretty good year. 

Sainsbury’s share price performance, on the other hand, has been pretty poor. It is down by around 14% year-to-date. The company announced a full-year dividend of 13.10p (a yield of 5.12%), but it is unlikely to be enough to entice investors given the poor share price performance. They can earn the same yield by simply putting their cash in the bank. 

Chris Beckett, head of equity research at Quilter Cheviot, says the supermarket remains “considerably smaller than Tesco, and in the high-volume, low margin world of food retail, scale is a critical factor and the ingredient for success”. 

Commentators also point out that Sainsbury’s non-food business (including Argos) has experienced a slowdown of late, and is letting the side down. 

Mould says: “It’s beginning to have a lot of similarities to the Marks & Spencer of old, running a two-pronged business with one engine constantly spluttering. Marks & Spencer has finally fixed its engine problem and is now racing away, which might give some hope to Sainsbury’s situation.”

Indeed, Marks & Spencer fell out of favour with investors a few years ago, even dropping out of the FTSE 100 between 2019 and 2023. However, since then, the company’s management team has been on a mission to reshape the old M&S.

This seems to be working – Marks & Spencer shares recently jumped to a six-year high after it announced its results for the 2023/2024 financial year. Profits had surged almost 60% compared to the year before, with food sales up 13% and clothing and home sales up 5.3%. 

“Two years into our plan to Reshape for Growth we can see the beginnings of a new M&S,” said chief executive Stuart Machin. “We are becoming more relevant, to more people, more of the time.”

If interest rates fall later this year and inflation continues to slow, supermarkets will be hoping to see shoppers putting more items in their baskets. This could create a tailwind going forward. 

Marks & Spencer’s (LSE: MKS) Christmas trading performance has confirmed that the company is back in business. Investors with a long memory, however, are going to take more convincing. M&S has been in turnaround mode since 2005 and along the way, it has suffered several false starts. Investors who have stuck with the business have been sorely disappointed, seeing a total return of just 4.4% per annum over the past 15 years, roughly half the FTSE All-Share’s total yearly return of 8%. Furthermore, over the past five and ten years the shares’ total annual return has been 1% and -1.9% respectively. 

However, the company has come a long way from the depths of the pandemic, when it cut its coveted dividend and had to renegotiate its overdraft facility with banks to give it more breathing space. In some respects, the pandemic was a wake-up call. While M&S had to close its larger stores selling so-called non-essentials, such as clothing and homewares, it was allowed to keep its food halls open to the public. Meanwhile, sales of non-essentials online boomed. Marks used this time to invest in its online business and food operations but reiterated its commitment to its physical stores.

Hybrid shopping is the new normal

Covid changed the retail industry dramatically, although not in the way many expected. Analysts initially believed it would upend how consumers shop, with physical stores dying out and consumers placing all their orders online. That hasn’t happened. Consumers have migrated away from some physical stores, but the enforced spike in online sales proved to be short-lived. Instead, a hybrid style of shopping has appeared. 

Results from the likes of British Land, Next and Shaftesbury Capital illustrate the shift. British Land has seen an increase in demand for retail parks, where consumers can drive in, park close to a range of large stores, do their shopping and leave. 

Next, with a presence in many of the UK’s retail parks, is an excellent example of how retailers have had to alter to adapt to this change. The group has invested heavily in building out its online infrastructure, but to complement, rather than replace, the physical business. Consumers can pick up and return goods at Next’s stores, so they don’t have to pay delivery charges or be at home when the package arrives. They can also browse a selection of other items in-store and do their shopping in the rest of the retail park at the same time. 

With its central London estate, Shaftesbury Capital is seeing a completely different trend play out. Demand for its smaller, centrally situated locations is strong as consumers still want to have a unique in-person experience for higher-end products. They may view the product in person and then buy it online. 

These results from across the retail sector show consumers still want an experience in person, but they don’t want to traipse around shopping centres or high streets trying to find something. They want a convenient experience where they can try something out and order it online later, or pick up an online order while they’re out collecting their weekly shop, without having to pay a delivery fee. If they stop and buy something else at the same time, then that’s a bonus. 

This seems to be why online-only retailers, such as Boohoo and Asos, have struggled in the past few years, while the old guard, Next and M&S, have seen a resurgence (M&S’s own online venture with Ocado isn’t performing as expected).

A focus on improving the quality of the stores has helped the recovery. M&S has invested heavily in competing with the UK’s supermarkets on the cost of essentials such as milk and eggs, while also targeting people who are more conscious of sustainability with RSPCA-assured milk and meat products.

What M&S is doing right

What M&S has really nailed over the past few years – and has increasingly emphasised since its new CEO Stuart Machin took over in May 2022 – is doing what it does best. 

It has doubled down on its higher-end food offering, betting that consumers will pay extra for high-quality food while also investing in its clothing. Rather than taking its market share for granted or flailing about trying to capture part of the next big trend, it has reinforced its market share in areas in which it is well established, such as food, clothing and physical stores. 

The strategy is certainly paying off. Despite all the talk of economic hardship, recession and a cost-of-living crisis, 22 December 2023 was the firm's best pre-Christmas food shopping day in its 140-year history. Food sales jumped by 10% year-on-year in the key third-quarter trading period, and clothing sales rose by 5%. M&S claimed to have the highest market share in both categories for over a decade. 

I don’t think it’s too much to say that M&S has turned itself around. But retail is a notoriously difficult industry to navigate. That makes it hard to say with any degree of confidence what the future holds. 

Based on current analysts’ estimates, the company will report net income of £459million for the year to 31 March 2024, putting the stock on a forward price/ earnings (p/e) multiple of 11.6, falling to 10.6 next year. Compared with Next (14.1 for 2025) and Tesco (11.4 for 2025), that looks cheap. Analysts also predict that the dividend yield will return to 2.3% next year. These numbers suggest the stock may have further left to run, but investors shouldn’t expect continued outperformance.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription. 

Marks & Spencer’s shares jumped by 9% on the news it is to pay a dividend for the first time since before Covid, say Oliver Ralph and Euan Healy in the Financial Times. The move comes as “bumper food sales” helped bring about a first-half result that exceeded expectations. Pre-tax profits hit £326m in the six months to 30 September, up by an annual 56%.

The firm says its success was due to “favourable market conditions” and competitors’ exits from the market. The shares have risen by 90% since January, enabling it to rejoin the FTSE 100 index and making it the blue-chip index’s second-best performer after Rolls-Royce.

Both the food and the clothing arms “look in their best shape for years”, says Alistair Osborne in The Times. Food, which has always done well, has been bolstered by “upgrades to 500 products”, as well as “a £30m spend on lowering prices across 200 products and locking them in on 150 more”.

This has been rewarded with market-share gains, mainly from a “lacklustre Waitrose”, and an 11.7% rise in underlying sales. Like-for-like sales across the clothing section rose by 5.5%, while operating margins jumped from 9.8% to 12.1%, with M&S also benefiting from recent efforts “to wean the group off promotions”.

M&S is now seen as “the UK’s best retailer” for women’s clothes, says Ellie Violet Bramley in The Guardian. Once M&S clothes were seen as either “frumpy” or “at best inoffensive”. But now it is appealing to female customers “who have one eye on Vogue and another on value”.

Much of the credit is down to the director of womenswear, Maddy Evans, who has “helped the brand to develop a better understanding of who their shoppers are”, so it can fill a gap between “fashion-forward but pricey” retailers and those “associated with clothing less likely to last”. Moreover, M&S has had success in third-party brand partnerships, which bring in “a wider demographic”, and has also improved an “antiquated supply chain”.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

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May was a positive month for the stock market, and DIY investors took advantage to increase their exposure to growth stocks and funds.

Despite the ‘Sell in May’ adage, major indices rose during the month. The S&P 500 soared 5.1%, while the FTSE 100 made modest gains of 0.3%.

Data from investment platform Interactive Investor (ii) shows DIY investors on its platform piled into artificial intelligence (AI) stocks and funds in particular. Semiconductor company Micron Technology (NASDAQ:MU) was the most-bought stock among ii’s DIY investors during May.

“A combination of surging AI demand, supply shortages and price hikes have pushed [Micron’s] stock to fresh highs and ignited heavy buying among ii customers,” the company’s head of investment, Victoria Scholar said.

Meanwhile, the most-bought active funds and exchange-traded funds (ETFs) reflected a divide between investors minded towards protecting their wealth and those seeking growth.

Which other stocks and funds were the most popular among DIY investors last month?

The most-bought stocks in May

Besides tech megacaps like Micron and Nvidia (NASDAQ:NVDA), the rest of ii’s most-bought stocks during May reflect investor appetite for staple UK companies.

“FTSE 100 heavyweights like BP (LON:BP.), Legal & General (LON:LGEN), Lloyds Banking Group (LON:LLOY) and Glencore (LON:GLEN) were popular choices among ii customers last month,” said Scholar. “NatWest (LON:NWG) was a new addition while FTSE 250 low-cost carrier easyJet (LON:EZJ) dropped off the list.”

^{Source: Interactive Investor}

The most-bought funds and ETFs in May

Money market funds have been popular picks for defensively-minded investors throughout much of this year, and that remained the case in May with the Royal London Short Term Money Market Fund topping the list of the most popular open-ended funds.

But alongside this, more adventurous strategies such as technology funds were popular among DIY investors, with new entrant VanEck Semiconductor UCITS ETF (LON:SMGB) proving the fourth-most popular passive fund.

“Many semiconductor shares have posted impressive returns so far this year, increasing the demand for funds in this sector,” said Tom Bigley, fund analyst at Interactive Investor.

Bigly noted that Micron, the top holding in VanEck semiconductor, has risen more than 200% so far this year as demand for high-bandwidth memory for AI servers has exceeded supply.

^{Source: Interactive Investor}

Technology was a prominent theme among actively-managed funds too, with two forms of the Polar Capital Global Technology fund appearing in the top 10 list as well as WS Blue Whale Growth Fund.

The most-bought investment trusts in May

Tech and innovation-focused investment trusts were also popular with DIY investors during May. Innovation-focused Scottish Mortgage (LON:SMT) retained top spot from the previous month: the trust’s largest holding, SpaceX, is expected to IPO in June, and as such was the focus of much investor hype during the month.

Investing in the space theme was clearly flavour of the month, as Seraphim Space (LON:SSIT) was the third-most popular investment trust on Interactive Investor, just behind the Polar Capital Technology investment trust (LON:PCT).

^{Source: Interactive Investor}

If you’ve been keeping a close eye on share tips 2026, then don’t miss this weekly round-up of the top stocks to consider for your portfolio.

The MoneyWeek share tips 2026 guide pulls together some of the most popular stocks from top share tipsters around.

As well as the UK financial pages, we look at publications across the pond for investors who want to diversify their holdings internationally.

Investors will undoubtedly want to refresh their finances this year – we look at dividend heroes, what's happening with gold prices and the best way to invest. If you're new to investing, here's how to start.

This list is updated weekly.

Share tips 2026: top stock picks of the week

Stocks to buy

1. Tapestry (NYSE: TPR)
Barron's
Tapestry's luxury leather-goods brand, Coach, is popular with younger consumers as it is more affordable than European ultra-luxury brands. The US group has upgraded its annual sales-growth guidance and its gross margin has improved, even with marketing and investments in new products. Despite economic challenges facing younger consumers and concerns over Tapestry's other brand, Kate Spade, analysts expect double-digit earnings growth amid global expansion. $145

2. CMC Markets (LSE: CMCX)
Investors' Chronicle
CMC Markets' full-year pre-tax profit of £101 million fell short of expectations owing to high operating and legal costs. But this financial year, CMC expects net operating income to total £460 million-£480 million, a 17%-22% increase from last year. This is due to the company's shift from being tied to volatile trading patterns to establishing itself as a “financial-architecture specialist for corporate clients”, making income more stable. This led to a 33% increase in net investing revenue, while the core trading division continued to grow. 462p

3. Mitie (LSE: MTO)
Investors’ Chronicle
Mitie's full-year revenue increased 10.5% thanks to organic growth and acquisitions. Adjusted operating profits rose 13% to £264 million, while the underlying margin improved despite rising national insurance costs. Free cash flow exceeded expectations, and new business wins boosted orders to a record £16.3 billion. Earnings per share are expected to increase from 14.4p to 16.4p by fiscal 2028. Despite the stock's valuation being broadly in line with its peers, the group has delivered “earnings surprises” over the past decade. 163p

Stock to sell

1. Ulta Beauty (NASDAQ: ULTA)
Barron's
Ulta Beauty's stock has more than doubled since the pandemic, but it is now down over 30% from its highs of February 2026. The US cosmetics retailer reported higher first-quarter sales, higher average purchases and prices, and an uptick in the number of members in its loyalty programme. But investors are concerned about the sustainability of earnings growth and margins in addition to the need for heavy investment to maintain market share amid fierce competition. Influencers promoting products on social media makes it difficult for bricks-and-mortar players to keep up. While Ulta's TikTok Shop is attracting new, younger customers, other consumers have to contend with high inflation. Avoid. 467p

Stocks to hold

1. Quanta Services (NYSE: PWR)
Barron's
America's Quanta Services, a provider of key infrastructure for electric utilities and pipelines, has benefited from the surge in demand for AI, with the shares up 50% since October 2025. Major technology firms are set to invest trillions in AI, leading to increased demand for electricity and data centres, which will need power plants to keep running; this helps explain Quanta's record $48.5 billion order backlog. Quanta is the partner of choice for many utilities owing to its equipment and large labour force, and it could benefit from the potential expansion of ultra-high-voltage transmission lines. Buy ($707).

2. VP (LSE: VP)
Investors' Chronicle
VP swung to a pre-tax loss due to a soft construction market and lower revenues. However, the equipment-hire company maintained the dividend, and leverage remained below target. Adjusted profit declined 26% to £27 million, in line with guidance. VP's restructuring of the Brandon Hire business, which included cutting branches and jobs, resulted in a £25 million charge, but should bolster margins. VP expects trading for the new fiscal year to meet expectations, with sales of £352 million and adjusted profit of £33 million. Analysts expect double-digit earnings-per-share growth. Buy (465p).

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Walmart issued a profit warning earlier this week. It was the second such warning from one of the world’s largest retailers in ten weeks.

Markets aren’t used to warnings from Walmart. Now they’ve had two in a row.

So what’s going on?

Amid all the recessionary talk, there is an easy and compelling gloomy story to tell here. It goes something like this.

Walmart is not a high-end retailer. Its customers shop there for necessities rather than luxuries. That group of people is being squeezed by soaring living costs. So they are spending less. That’s not just bad news for Walmart – it’s bad news for the broader US economy (and probably for everywhere else too).

It’s all grist to the bearish mill, and it also contains plenty of elements of truth.

However, it gets a little more complicated when you look deeper.

How coronavirus split the economy

The problem at Walmart is not about sales. For the second quarter, those are actually now forecast to be higher than originally expected.

Instead it’s about inflation and profitability. The company is selling more low-margin stuff like food at higher prices and to more people (because some shoppers who are feeling the squeeze elsewhere are “trading down” to Walmart).

The problem is that it’s selling less higher-margin “general merchandise”, like electronics, clothing and home furnishings. In turn, it’s having to drop the prices of these items to shift them, which then has an effect on margins too.

Now you can argue that people are spending less on home furnishings and electronics because they’re struggling to pay for food and other groceries. There’s almost certainly truth to that and Walmart certainly seems to feel that’s the problem.

But you can also make the case that it’s because customers binged on that sort of stuff last year. Sure, demand for “big ticket” items has fallen. But no wonder – everyone bought their “big ticket” items last year. There are only so many exercise bikes and bits of garden furniture one household can own.

This interpretation is somewhat backed up by the fact that “back to school” season has apparently started well – in other words, “general merchandise” that’s actually still required hasn’t been hit by the cost of living squeeze.

None of this is to say that the cost of living isn’t a problem. It is. But it does highlight how confusing the current environment is.

In effect, coronavirus pulled forward a lot of demand for “indoor” consumer goods. Companies like Walmart faced a surge in demand, alongside deep uncertainty about security of supply. So logically enough, they over-ordered to make sure they could meet this demand.

Now that economies have re-opened, demand has shifted from “indoor” goods to “revenge spending” on “outdoor” services, like restaurants, hotels, and holidays.

Almost inevitably, despite the logistics expertise of the likes of Walmart, this means they now face inventory bloat. This in itself does not necessarily mean that the consumer is under a massive amount of pressure (yet).

In terms of the health of the consumer, one indicator is to look at demand for holidays and the like to see if it reflects this picture of “indoor” versus “outdoor” spending, rather than an overall slump in demand.

An article in the FT notes that there are more than 400,000 tourism jobs going across the southern eurozone. That gives some idea of the mismatch between capacity and demand right now.

Again, this is logical. The tourism business was shut down for the whole of 2020 and much of 2021. So just as big retailers like Walmart saw a surge in demand which resulted in over-investing, big leisure businesses saw demand collapse, which resulted in under-investing.

In effect, the delayed demand from the past couple of years is now hitting an industry which does not have the capacity to absorb it.

The most important factor when considering what happens next

The question then is: what does this imply for the longer run?

On the one hand, it suggests that we could start seeing disinflationary forces coming from the “indoor” sector. They need to clear inventory, so prices will fall. They probably over-hired, so even if they don’t shed staff, they won’t be recruiting, so some pressure on wages will decline.

On the other hand, the leisure industry will probably be a little more circumspect. Walmart’s type of business is about pile-it-high, sell-it-cheap. The leisure business is a bit more complicated. Cutting capacity and charging more is frequently a viable option in a way that it isn’t in supermarket-style retail.

There has long been a lobby against cheap, accessible travel for all, and I suspect it will be increasingly vocal over the coming years.

So I suppose we’d expect the “indoor” business to see some sort of return to normality by next year, while the leisure industry might well take longer.

The thing is, while it’s very interesting to think about how the coronavirus has had this knock-on effect across all these businesses, much of it is a red herring when it comes to the future for inflation and recession.

The real problem is energy prices. Higher energy prices affect everyone, regardless of which business you’re in. If we’re to avoid recession, this is the part that needs to improve.

Energy was battered by the coronavirus too. Demand collapsed, and as a result, supply was under-invested in. We’re now facing the consequences of that.

However, you then throw in the war in Ukraine on top of that, and the resultant reshuffling of the geopolitical cards, and you have a situation whereby it will be much harder to return to “normal”.

We’ll have more on this in an upcoming Money Morning. For now, the main inflation/recession gauge to watch is probably the oil price (or wholesale electricity prices in Europe) if you want a good indicator of where we’re heading.

Frasers Group (LSE: FRAS) is a company the market loves to hate. Formerly known as Sports Direct, the company’s founder and former CEO, Mike Ashley, has a bit of a bad reputation, but it’s hard to deny the man knows what he’s doing.

From humble beginnings to a global giant

Frasers began life from a single store in 1982. Over the following four decades, Ashley steered the group through multiple challenges and economic environments while taking advantage of other companies’ problems to grow the business.

In the 2000s Frasers went on an acquisition spree, snapping up sporting brands such as Dunlop, Slazenger, Karrimor and Kangol from distressed sellers for knockdown prices (Dunlop was later sold to a Japanese firm in 2016 for several multiples of the purchase price). These brands have become an important part of the business, and ultimately give Sports Direct a competitive advantage over peers.

One of the trickiest parts of retailing is agreeing terms with suppliers, especially when those suppliers are international giants. By acquiring its own brands, the firm removed the issue of dealing with pushy suppliers and it gained more control over its finances.

With its control over the supply chain, Frasers was (and still is) able to keep costs low and beat other retailers on price. And Ashley doubled down on this growth formula in the years before his departure as CEO.

In 2013, it acquired fashion retailer Republic after it went into administration, adding 116 stores to its footprint. Then in 2017, the group paid $101m for US retailers Bob’s Stores and Eastern Mountain Sports from their parent group after it filed for Chapter 11 bankruptcy protection.

In 2018, the group acquired House of Fraser after it entered administration, and then Evans Cycles, which had also entered administration. Other deals completed in recent years include Jack Wills and DW Sports Fitness.

Frasers acquisition spree has helped the company grow

These are just the largest acquisitions the company has completed over the years. While it might seem as if Frasers has been throwing its money around, there’s a method in the madness. It costs a lot of money and time to build a retail brand, but most retailers don’t succeed. So, why bother wasting time and money to build a brand if you can just buy one on the cheap?

Ashley’s approach to running a successful retailer has been very similar to the way an investor might pick stocks. An investor will look for the best companies that they understand, and try to buy a basket of these businesses at knock-down prices. Even if one or two don’t work out, the odds are that the majority will produce attractive returns.

Ashley has built a basket of sport-retail focused businesses on the cheap and while some might not work out, the odds are the group as a whole will.

No matter what you think about Ashley, it’s difficult to deny that this approach has worked. Over the past decade the stock has yielded a total return of 9.8% a year, only slightly below the 10.4% a year produced by Next (LSE: NXT), which in my view is one of the best-run retailers in the country.

The company is moving on to the next stage of growth

Ashley was replaced as CEO by Michael Murray in May of this year. Leaving aside the fact that Murray is Ashley’s son-in-law and received £21m in consultancy fees before he took over, as well as being in line for a bonus of as much as £100m, he is now in charge of leading the company into the next stage of its growth.

He’s trying to shift the focus away from its image of a low-cost sporting goods retailer, towards a luxury brand. To that end, the business is investing heavily in its luxury brand, Flannels, which is opening several huge stores across the UK focusing on men’s, women’s and junior designer clothing, footwear and accessories.

For example, Flannels opened a huge new luxury store in Liverpool this year, the first of its kind in the city and one of the largest luxury investments in the UK. This is an extension of the group’s long-standing strategy profiting from opportunities (in this case a city) other retailers are overlooking.

There are some corporate governance issues around Murrary’s appointment and pay, but it seems as if shareholders are already seeing some results from this very expensive manager.

Following a bumper trading performance for the 52 weeks to 24 April, Frasers is now projecting adjusted profit before tax of between £450m and £500m for the next financial year, up from £366m. The so-called “Premium Lifestyle” side of the business is proving to be a huge success with revenue for the period up 43.6% mainly due to the new luxury Flannels sites.

As the company’s profits boom, it’s investing hundreds of millions of pounds in new warehousing facilities, and automation. It’s also funding new facilities in markets such as Europe, which could be a key engine of growth over the next couple of years. And as always, Frasers is looking for acquisitions to improve its footprint and customer offering. Considering the general economic backdrop, it looks as if the business is going to have plenty of options.

The stock’s valuation is not too expensive considering its prospects

At present, Refinitiv analyst estimates have the company reporting earnings per share of 57p for its 2023 financial year. That suggests a forward price/earnings (p/e) multiple of 13.2, which seems neither particularly expensive nor particularly cheap. However, these numbers do not yet reflect the company’s upbeat forecasts for the year ahead. As such, I wouldn’t be surprised if we see an upward revision in earnings estimates over the coming days. While the company does not offer a dividend, it has a history of returning cash to investors with share repurchases.

Frasers might have a mixed reputation, but there’s no denying the company’s approach works. The group stands out in the incredibly crowded retail sector for its value investing-like approach and growth in a changing market. As it gears up for its next phase of growth, investors might want to take notice.

The sale of Boots was meant to be the blockbuster deal of the first half of this year. After a private-equity buy-out, the chain merged with Walgreens of the US in 2014 in a deal worth £9bn at the time. As it turned out, however, there were no real synergies between the US and British businesses. The plan was to sell it off to the highest bidder, and in the wake of all the offers for Morrisons in 2021, hardly the most exciting business in the world, it was hoped more than £8bn could be had for the chain.

In the end, however, it seemed no one was willing to pay more than £5bn, perhaps not even that. Instead, Boots will soldier on, perhaps looking instead to a flotation next year. It’s a difficult market and explanations for why the sale bombed would not be hard to find. Yet Boots is a respectable company, if hardly an exciting one. It needs to reinvent itself before it is put back on sale.

Time for a makeover

First, it could launch some new brands. It already has the successful No. 7 range of make-up. But it has the space in its stores to try out all kinds of new products alongside its own-label offerings. It could be trying new types of health food and supplements, for example, or offering classy ranges of razor blades and shaving foams, a market where brands such as Harry’s have done well over the past few years. It could be trialling different brands of eyewear in its existing opticians’ outlets. Lots of the big consumer-goods firms have done well from brand diversification over the last decade, but not many retailers have followed suit. Boots could open lots of potentially high-growth businesses if it chose.

Next, healthcare. Boots is offering more and more simple diagnostic tests and minor treatments through its stores. But it could be doing a lot more. The GP system in the UK is falling apart, with hardly any appointments available, and rarely in person when they are. There will be lots of demand for more private care, and Boots is a natural company to step into that space.

Third, it could acquire a series of health-tech start-ups to build the world’s best range of app-based diagnostic and heath apps, and roll them out around the world. The tech giants such as Apple and Amazon have been spending huge amounts of money building healthcare apps. Indeed, one of the main reasons Apple has pushed its watch so hard is so that it can collect health data on people. The venture-capital industry spent an estimated $57bn on health-tech start-ups last year and there is little sign of that slowing down. Plenty of people clearly think there is a huge market for health apps, but Boots has the expertise in the sector and has a brand that people trust. It could be building a global business online as well as a UK one in retail.

Boots should push back into pharmaceuticals

Finally, get back into the pharmaceuticals business. It may be ancient history now, but Boots was once a major drugs company (it invented the painkiller ibuprofen). That was all steadily sold off and it never managed to turn itself into GlaxoSmithKline or AstraZeneca. But the UK has a thriving biotech, life sciences and vaccine industry with lots of new companies. Boots could start investing in those and set up its own incubator, especially close to some of the major universities. It would only take one or two successes for that to add a lot of value to the company.

Boots is certainly no disaster. It has done better than many private-equity-owned companies that have gone into steady decline. It remains the UK’s leading pharmacy chain, a valuable asset, and has a strong brand. But for the past 20 years there has been very little in the way of ideas or ambition. It could do a lot better. Healthcare and beauty should be one of the most exciting markets in the world. For Boots to be so dull and boring that no one wants to buy it is a very disappointing outcome, and an indictment of a management team that is drifting aimlessly. It needs to make itself a lot more exciting before it goes on sale again – and if it did it might even be able to justify the £8bn price tag its owners were initially hoping for.

It’s an incredibly challenging time to be a retailer.

Not only are these companies having to deal with rising input costs across the board and demands for higher wages from employees, but the cost of living crisis is also weighing on consumer sentiment and spending power. These dual headwinds of lower potential sales and higher costs are the worst case scenario for the sector.

However, some retailers appear well positioned to capitalise on this environment. Next (LSE: NXT) has spent a huge amount of money building out its online infrastructure, which gives the firm a competitive advantage in the viciously competitive retail sector. Meanwhile, supermarket retailer Tesco (LSE: TSCO) is able to use its size and economies of scale to keep costs low for customers. Those are the reasons why these two stocks are my top picks in the sector.

But keeping costs as low as possible is also at the core of B&M European Value Retail’s (LSE: BME) business model.

Putting customers first with low prices

Over the past six years, B&M has seen revenues nearly double as management focuses on providing what consumers want: quality goods at a low price.

This is going to be an advantage as consumers start to watch their budgets. According to the company’s own price comparisons, a basket of food and fast-moving consumer goods (things like shower gel and deodorant to you and me) is about 15% cheaper in its shops compared to a supermarket competitor.

What’s more, 93% of all the products sold at a B&M store are less than £20.

The organisation’s “stack them high, sell them cheap” business model has proved hugely successful, powering growth from just 21 shops in 2004 to 1,125 at the end of its 2023 fiscal first quarter.

It looks as these qualities are helping the group cope well in the current environment.

According to its latest trading update, covering the 13 weeks to 25 June, revenue declined by 2.2% on a constant currency basis compared to the previous year. However, this comparison is a bit unfair as it includes a period of lockdowns in 2021, when restrictions stopped consumers from visiting many of the company’s competitors.

As the economy has reopened consumers have returned to their normal shopping habits. This has had a disproportionate impact on B&M, which was classed as an essential retailer throughout the pandemic. Revenues dropped 19.1% on a like-for-like basis over the five weeks to the beginning of April due to this anomaly, although during May and June revenues declined just 1.6%, which I think is a better indicator of how the business is performing in the current economic climate.

Further, there was a notable improvement at the group’s French business with sales jumping from £68m to £91m. The company increased the size of its store portfolio in the region by 4%.

It’s not all good news for B&M

Unfortunately, the group is expecting consumer shopping habits to change due to the cost of living crisis. It’s mainly expecting consumers to shift their spending from higher margin general merchandise products towards food and other essentials.

This could hit B&M’s earnings before interest, tax, depreciation and amortisation (Ebitda) margin by between 70 and 130 basis points for the year. After factoring in this margin pressure, management is forecasting 2023 Ebitda of between £550m and £600m. That’s below the level achieved over the past two years, although it is nearly double pre-pandemic levels.

At the same time, the group is having to deal with a major internal challenge. CEO Simon Arora is stepping down and is being replaced by the firm’s CFO. Arora has been steering the company since 2004, when he acquired the chain of shops with his brothers. His vision and leadership have helped turn B&M into what it is today, one of the country’s largest retailers with a place in the FTSE 100.

Despite the economic climate, I’m more concerned about this change. B&M needs a steady hand on the tiller right now to help it navigate the storm. Transitioning to a new CEO is always a challenge, and it could become a distraction the company can ill afford.

Still, despite this factor, I think B&M possesses the sort of competitive advantages that are required to prosper in a tough market. The stock also looks appealing from a valuation perspective.

Based on Refinitiv analyst estimates, the shares are trading at a forward price/earnings (p/e) multiple of 10.6. Analysts are also projecting a dividend yield of 5.2% for the current financial year.

While there’s no denying the business is in for a rough ride, it seems there is a lot of negativity already factored into the share price. On that basis, I would be happy to consider this stock for my portfolio as a potentially undervalued growth play with attractive income credentials.

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Tesco looks well-placed to ride out the cost of living crisis – investors take note

The cost of living crisis is hurting retailers – here are the stocks to avoid

Next’s results stand out against a tough retail backdrop

The cost of living crisis is only going to get worse for consumers. According to economists, the UK is expected to have the highest inflation in the G7 not just this year but also in 2023 and 2024 as the country is far more exposed than other regions to rising energy prices.

Many European countries have placed strict limits on household energy bills while other G7 nations, such as Japan and the US, are much more self-sufficient in gas and other types of energy. Higher energy prices account for around half of the UK’s inflation rate.

A retailer that is well-placed to dealing with rising inflation

The cost of living crisis is both good news and bad news for Tesco (LSE: TSCO). On the one hand, reduced consumer spending will hit sales, but on the other, by keeping costs low the business could grab market share.

And it seems as if that’s just what’s happening.

The company’s Aldi Price Match promise and Low Everyday Prices products recorded volume growth of 19% year-on-year during the 13 weeks to the end of May helping Tesco grow its overall market share.

Alongside these numbers CEO Ken Murphy said the group is “laser focused” on keeping the cost of its wares down as Tesco does “everything” it can to maintain its value proposition. Overall sales for the period rose 2%. Growth at the firm’s Booker wholesale arm jumped 19.4% as large events returned to the social calendar.

What I really like about Tesco as a company is its size, diversification and flexibility.

To cope with inflationary forces, Tesco plans to reduce costs by £1bn over three years by streamlining its property footprint and cutting head office costs. It is also re-thinking the way staff are deployed in stores and there’s scope to reduce costs with a new checkout-free store concept. It has been trailing this since 2019 at its headquarters in Welwyn Garden City. The cost savings of these initiatives will be returned to customers via lower prices.

At the same time, its Booker wholesale business, bank and mobile arms provide additional diversification and cash to improve the customer offering.

Cost savings help Tesco dealing with rising prices

Tesco’s supply chain is miles ahead of the competition. It has been able to navigate the UK’s supply chain issues by investing in new and old technologies, such as electric HGVs and rail.

Over the past year, the retailer has increased the number of its containers transported by rail by nearly 50%, with plans to increase capacity by around a third in the near future. Not only is this great for its green credentials, but each train takes around 40 HGVs off the road, slashing the number of drivers required in a tight labour market.

All of these advantages help Tesco stand out in a highly competitive market which is facing extremely tough conditions.

Tesco stands apart from the crowd as uncertainty builds

Right now, I’m hard pressed to find any retailer that looks attractive considering the current economic outlook. Some operators like Next (LSE: NXT) stand out because of their competitive advantages in areas such as order fulfilment. Others, such as Watches of Switzerland (LSE: WOSG) stand out because they target a specific niche, which has a certain level of immunity from cost of living trends.

But for most retailers, life is only going to get harder from here as consumer purchasing power declines and the cost of doing business grows.

Tesco is already noticing changes in consumer behaviour as prices grow. “We are seeing some early indications of changing customer behaviour as a result of the inflationary environment,” Murphy noted in the company’s latest trading update. This makes it harder not just for businesses, but for investors as well to find businesses that can navigate the economic environment.

Tesco’s scale and competitive advantages help it to stand out. If it can keep prices low for consumers, and keep a lid on costs, it should be able to navigate the storm. Granted, it seems unlikely the company will be able to repeat last year’s growth, (it is guiding for adjusted operating profit from operations of £2.4bn to £2.6bn this year, compared to £2.7bn in 2021) but these challenges already seem to be baked into its valuation.

The shares trade on a forward price/earnings (p/e) ratio of 11.9, which is not too demanding. They also yield 4.3% following the firm’s latest dividend hike. Further, Tesco has earmarked £750m for share repurchases over the next year, equivalent to an additional 10p per share cash return.

Tesco is a slow-and-steady retail giant and it’s unlikely to produce market-beating returns in the long run. However, in an uncertain macro environment I think the business has multiple qualities that will help it navigate the uncertainty. Tesco could be a safe port for investors who’re looking for somewhere defensive to stash their money until the storm passes.

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Why the cost of living crisis could be a boon for this cheap retailer

The outlook for the retail sector is getting worse by the day. Today, not one but three companies have warned on their prospects as the cost of living crisis and inflationary pressures start to bite.

Alongside its results for the year to the beginning of April, Halfords (LSE: HFD) warned that rising costs and falling consumer confidence will “present short-term challenges” this year.

Halfords, the UK's top seller of motoring and cycling products and services, saw sales and profits rise by 6% and 50% respectively for the fiscal period, but after a period of frantic activity by consumers, the outlook is now darkening. Consumers are pulling back on spending, especially on more expensive items.

The cost of living crisis starts to squeeze spending

Online fashion retailers Boohoo (LSE: BOO) and Asos (LSE: ASC) have also both issued warnings this year. Asos, a serial profit warner recently, now expects pre-tax profits for this year to be between £20m and £60m, a far cry from the £110m to £140m previously forecast.

Asos blamed a higher number of returns in the March to April period as the reason for its worse-than-expected performance. Management believes this will continue as consumers feel “the impact of rising inflation.”

Meanwhile, Boohoo said that sales for the three months to the end of May had fallen by 8% year-on-year, although the company did not adjust its full-year forecasts (it expects to see sales growth in the low single digits, and underlying profit margins of 4%-7%).

All of these figures seem to show that the cost of living crisis is hitting consumers hard and that discretionary spending is falling as a result, and I don’t doubt that. But there are other factors at play here too.

The retail industry is struggling with changing consumer attitudes

Over the past two years, stuck-at-home consumers have had more money in their pockets and they've been spending this cash. This has contributed to the global supply chain crisis. There’s been a surge in demand for consumer goods and this rush has snarled up supply chains.

But now the economy has almost fully reopened, and consumer purchasing power is under pressure, spending patterns are normalising. For some bizarre reason, many companies had failed to prepare for this to happen. We can see it in the disruption at airports, lack of staff at restaurants, empty garage forecourts and inventory adjustments.

Across the pond, retailer Target (NYSE: TGT) has warned on profits twice already this year as it offloads inventory built up in 2021. The company expects demand to stay strong for food, household essentials and beauty products, but sales of more discretionary items such as televisions have “changed rapidly” since the beginning of the year.

“The spending pie was heavily skewed toward product and goods [and away from services] in 2020 and 2021,” Ken Perkins, president of research firm Retail Metrics has noted. “To get that mix right is difficult, and that’s where the mismanagement [of inventory] comes in.”

Perkins’s comments, published in the Financial Times, illustrate the biggest challenge facing both retailers and retail investors today. Demand has been dragged forward for big ticket times, which may explain why Halfords is struggling.

At the same time, Boohoo and Asos have lost their competitive edge in the online retail marketplace. In the pandemic every retailer rushed to build out its online presence. Consumers now have far more choice.

It’s hard to identify winners in such a tough market

Unfortunately, this does not make life easy for investors. The cost of living crisis will certainly have an impact on the retail sector, but some companies' problems are far deeper than that.

Retail has always been and will always be a viciously competitive sector. That’s why I think there are really only a handful of stocks that deserve attention. Next (LSE: NXT) is my favourite because it is slowly becoming an infrastructure company as well as a retailer. It is constantly spending and developing its offering to stay ahead of the competition.

Then there’s Watches of Switzerland (LSE: WOSG). The market for luxury watches is pretty much immune to the cost of living crisis. Buyers who are willing to pay £5k for a watch are not going to be worried if it suddenly costs 10% more (a large number of purchasers use zero-percent financing as well). Further, the demand for some models is so hot, waiting lists now stretch for over a decade.

Retailers are going to face a range of challenges over the next year or so. Companies might be quick to blame the cost of living crisis for their issues, but there may be other factors at play. Investors need to keep a close eye on the competitive advantages (or lack therefore) available to different businesses.

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Why the cost of living crisis could be a boon for this cheap retailer

In December 2020, my colleague Matthew Partridge suggested in MoneyWeek magazine that adventurous investors might consider shorting the Ocado (LSE: OCDO) share price (or at least avoiding or selling out of the stock) due to its excessive valuation and growing operational challenges. This call was right on the money (quite literally). Since then, the stock has fallen more than 60%.

The FTSE 100 retailer was one of the big winners of the coronavirus pandemic, but the company has not been able to sustain its performance. In its latest trading update, the group announced that sales fell 8% in the two months to the end of April, compared with a 5.7% decline in the previous three months. Management now expects sales growth of less than 5% for the current financial year, compared with an earlier forecast for 10%.

Even the company’s joint venture with Marks & Spencer (LSE: MKS) is not helping the online grocer navigate the current retail environment. The cost-of-living crisis combined with a “return to more normal consumer behaviours as restrictions have ended,” is driving a shift away from online shopping.

Still, there's more to the story here than just the cost of living crisis and reopening of the UK economy.

Ocado is facing several big challenges

Ocado is really two different businesses. Both of these are currently having to deal with some major challenges.

Ocado Retail, the online grocer jointly owned with M&S, is poorly positioned for a tough economic climate. According to the consumer magazine Which?, Ocado is the second-most expensive traditional supermarket after Waitrose, judged on a basket of 63 groceries.

In an environment where consumers are watching every penny, that puts the group at a disadvantage to other retailers. It’s no wonder the value of the average basket has fallen by 9% compared to a year ago.

Still, at least this side of the business is earning a profit. Retail earnings before interest, tax, depreciation and amortisation (Ebitda) totalled £150m for fiscal 2021.

The other side of the business, the logistics technology side, is still bleeding red ink. Ocado is selling its robotics and automation technology around the world. Demand is high for these systems and it has only increased after the pandemic exposed the weaknesses of a human-backed fulfilment system.

The group has inked deals with major retailers to roll out 48 customer fulfilment centres (CFCs) by 2035. This could increase the share of revenues from the ‘International Solutions' segment from 2% to 16% (at the high end) by 2026 according to projections.

While these CFCs could become a major revenue generator for the group by the end of the decade, (customers will pay capacity-linked fees when they’re in operation) the high cost of getting them up and running is weighing on Ocado’s bottom line.

Capital spending has quadrupled since 2018 and could rise even further this year. Last year, spending totalled £680m as the corporation ramped up spending ahead of what has been described as a “crunch year” in 2022. By the end of this year the group will be managing 12 live CFCs, up from four at the start of the year. A further 19 are in various stages of construction.

Capital requirements are growing and so are losses

Since its IPO in 2010, Ocado has been burning through cash as it pursues its aggressive growth plans, and the company has returned to the market this week for yet another capital infusion.

The company has raised £575m through a share placing to fund its expansion plans and invest in innovation. City analysts had been expecting the firm to tap investors for more cash at some point in 2022, but the scale of the fundraising seems to have caught some off guard.

Indeed, Shore Capital analyst Clive Black notes that the placing “reflects material cash burn and concerns about liquidity.” It comes as Fitch, the credit rating agency, downgraded Ocado’s outlook to negative on Monday, citing a slower forecast for its international tech operations to turn profitable.

Ocado has always been a jam tomorrow type business. It has haemorrhaged cash since its IPO and struggled to build real value for shareholders. While the company’s technology is clearly in demand, if the group cannot make any returns on its investments, it’s going to struggle to win over the market.

Investors also need to take Ocaod’s legal battles into consideration. It is having to fend off claims from Norway-based Autostore, which believes its grid-based technology forms the basis of Ocado’s CFC platforms. The two corporations have been battling it out in the courts for years with not much to show for it. And the bills are mounting with Ocado forking out over £28m on legal fees in 2021 alone. On that basis I don’t think it’s unreasonable to suggest that some of the recent cash call will be earmarked for lawyers fees.

Taking all of the above into account, it’s clear to me why the market has turned its back on the Ocado share price. The stock is down 46% this year and I doubt market sentiment is going to change any time soon.

Refinitiv analyst estimates have the company losing £310m in 2022 and £242m by 2023. Even the most optimistic analyst projections don’t have profits arriving until the end of the decade at the earliest.

In the meantime, the group is going to have to continue to tap investors for funding to support its capital spending and legal battles. Despite the firm’s technological prowess, investors might want to sit this one out.

The Marks and Spencer (LSE: MKS) share price has been a perennial disappointment for investors over the past 20 years.

Since May 2002, the share price has lost 63%. On a total return basis (ie including dividends) the picture is a bit better, but investors have still lost money.

The company’s story is one of strategic missteps, poor capital allocation decisions and management taking the firm’s brand for granted. As the retail landscape has shifted, M&S has failed to move with the times, and the business has been run with the single goal of generating as much cash as possible to fund shareholder returns. Improving the customer experience has often been neglected.

If you’ve ever visited one of the company’s larger stores (at least prior to the launch of its new strategy), you’ll know what I’m talking about. Stores were often tired, jumbled and faded, with a lack of stock and some odd fashion choices.

However, in 2020 the company launched its “Never the Same Again” programme with the goal of refreshing M&S and positioning it for the 21st-century retail landscape.

Is the Marks & Spencer comeback crumbling?

The market’s initial reaction to the strategy was incredibly positive. Despite the pandemic, between July 2020 and the start of this year, Marks & Spencer shares returned more than 160% excluding dividends, compared to a return of just 25% for the FTSE All-Share Index.

Unfortunately, this year the stock has lost some of its shine. M&S shares have crumbled by around 45% due to wider concerns about the cost of living, and the impact on consumer spending. Rising costs also threaten profit margins and could throw a spanner in the turnaround plan, which has really only just begun.

However, figures for the year to the start of April show that the group is moving in the right direction at least. Pre-tax profit, excluding exceptional items, totalled £523m, up £50m on the previous financial year. Meanwhile, revenues grew by 7%. Excluding lease liabilities, net debt also fell from £1.1bn to £420m.

These numbers are pretty impressive, especially compared to the rest of the retail sector. Rampant competition is proving a significant headwind for e-commerce retailers such as Boohoo (LSE: BOO) and ASOS (LSE: ASC), while bricks-and-mortar retailers are struggling to compete with the online players, which have a lower cost base.

M&S is both a food retailer and a clothing and homewares shop, which gives the business a competitive edge in a highly competitive market. There are three branches within walking distance of me right now, all M&S Food Halls, and they’re always quite busy. Located next to (or above) London Underground stations, they offer click and collect services for other M&S products and are a one-stop shop for travellers who want to pick up food or other products on the way to or from work.

Admittedly, this is a very London-centric view of the enterprise, but I think it illustrates how M&S is adapting and changing to the “new normal” in the retail market. In my experience, no other retailer offers the same kind of experience. I can order something from the company online before 11AM today, and pick it up on my way into the office tomorrow, along with lunch and other essentials if I want them.

By revamping its food business, and focusing on the consumer rather than the shareholder, M&S has been able to upgrade its profit forecasts twice during the last financial year. That’s why Marks & Spencer shares became a market darling in 2021.

The M&S share price is not immune from the cost of living crisis

Despite its progress over the past couple of years, M&S is now warning that consumer confidence will hurt growth in its current fiscal period. Ocado Retail, the online grocer that M&S jointly owns with Ocado (LSE: OCDO), which has been a key area of growth for the group since the partnership began in August 2019, is now only expected to report sales growth in the “mid-single digits,” compared to initial indications of 10% year-on-year growth.

Management also expects the profit contribution from the joint venture to be “minimal” this fiscal year. Last year the group earned £13.9m from Ocado Retail and during the pandemic, M&S’ share of the profits totalled £78.4m.

Ocado, which also released its figures for the quarter to the end of April today, noted that while customer numbers have risen 12% year-on-year, sales have declined as “consumers respond to short-term discounts and promotions,” due to the cost-of-living crisis which has compounded “the impact of a return to more normal consumer behaviours as restrictions have ended.”

These headwinds, as well as M&S’ decision to exit the Russian market (costing £102m in sales annually) means it has started the financial year at a “lower adjusted profit base”.

This warning on growth, as well as the decision not to pay a dividend for the second financial year in a row, is disappointing for investors.

Nevertheless, while some might see this as a reason to avoid M&S, I think holding back on a dividend is a good decision. In the five years to the end of 2019, the firm paid investors around £300m a year in dividends. Considering the current economic environment, the decision to use excess cash to cut debt and invest in growth instead is the right one.

Yes, the organisation is facing an uncertain environment and yes, it has made plenty of mistakes in the past – but M&S seems to be heading in the right direction.

What’s more, after recent declines the stock appears relatively good value. According to Refinitiv broker estimates, the shares are selling at a 2023 price/earnings multiple of 7.4. There may be more pain ahead for the retailer and the UK economy, but it seems to me there’s already a lot of bad news reflected in this valuation.