Following the suspension of GAME Group's shares yesterday, it appears that the major retailer of video games will become the next high profile retail casualty, following in the wake of the likes of Woolworths, Oddbins and Focus DIY.
Yet again, it appears that a combination of savvy shoppers willing to buy goods online rather than through a bricks and mortar retailer, together with increasing rents and weak consumer demand are behind their demise. In addition, GAME has also had to deal with the increase in digital delivery for games through systems such as Steam and Origin, which allow gamers to buy games online and download the code without the need to physically purchase a DVD copy. In a way, this is no different to the challenge iTunes poses traditional music and entertainment retailers, such as HMV.
I have been warning investors for some time that retail stocks are not in great shape generally, and whilst some, such as John Lewis, continue to post impressive results, others may find 2012 to be just as tough as last year. It is likely that the extended Sunday trading hours during the Olympics, and expected surge in spending around the Jubilee may help a little, so long as household budgets remain so constrained - at least from an investment viewpoint - there are better sectors in which to invest.
In the Budget speech yesterday, George Osborne delivered a fairly punchy statement, and one that may help sustain the very fragile recovery in the UK economy.
The increase in the Personal Allowance from £7,475 to £8,105 from next month and £9,205 in April 2013, should put a little more in consumer's pockets, so this may be marginally good news for the beleaguered High Street. Of course, those consumers will be paying more to fill up their cars from August, with the 3p increase in fuel duty confirmed, which will negate some of the positive effect. Also, the freezing of the age allowance, whilst not a tax hike on the elderly, may have an adverse effect on those whave retired or are nearing retirement.
In terms of the bigger picture, the UK economy is in a little better health than a year ago, and slow but steady progress appears to have been made. Borrowing in the 2011-12 is expected to be £126bn, £9bn than the year previous and a little ahead of estimates. There will also be a further boost to the public purse when the Royal Mail Pension Plan transfers to private ownership. George Osborne expects Consumer Price Inflation to fall below the 2% target by the end of 2012 (which, in my opinion, may be a little optimistic due to oil prices) and has reaffirmed the 2% level as being the long term target for the Bank of England, together with a continuation of the Asset purchase programme in the 2012-13 Tax Year.
Osborne has also signalled the possibility of the Debt Management Office issuing Gilts with a duration of greater than 50 years, and even possibly irredeemable, to lock in to the low Gilt yields at present. This seems a prudent move, though much depends on the ability for the UK Government to retain the AAA status from credit rating agencies, which is currently under threat.
Overall, for thematic investors, I do not believe the Budget included any profound changes. Clearly there was no shift in the policy of low inflation, low interest rates, and I continue to expect Base Rates to stay unchanged to at least 2013. Consumer stocks may benefit slightly from the tinkering with the personal allowances, but for Equities, I continue to favour defensive positions. Steady as she goes, at least for the time being, although factors beyond the control of either the Government or Central Banks, such as a further spike in oil prices, could yet jolt the fragile recovery.
The Bank of England has now left the Base Interest Rate unchanged at 0.5% for 3 years. As I have commented in previous posts, this is noteworthy not only for the fact that this rate is the lowest ever set by the Bank in their 300 year history, but it is also highly unusual for the rate to be kept stable for such a length of time. (Of course, in the background, the Bank have been effectively lower rates even further by the programme of Quantitative Easing).
My view remains that the Bank of England will keep the Base Rate at 0.5% for the rest of 2012 at least, and you would have thought this would give some comfort to the millions of mortgage account holders. However, events over the last couple of weeks has shown a growing disconnect between the Base Rate and the "real" rate as set by the London Interbank Rate, or LIBOR for short.
As tensions begin to rise once again over the almost inevitable Greek default, so does the mistrust, and Banks are having to pay more to borrow money to lend on to mortgages and loans. On top of the funding requirements, banks have been ordered to shore up their financial strength and recapitalise under the terms of the Basel III Accord.
Citing the increase in funding costs, Royal Bank of Scotland, Halifax and Bank of Ireland have all signalled they intend to increase the Standard Variable Mortgage Rate (or SVR) over the next few months. RBS were the first to announce an increase, from 3.5% to 3.99%, followed by Halifax, who have announced that the "cap" on their SVR would also increase by a similar amount. Yesterday, Bank of Ireland announced that their SVR would increase from 2.99% to 3.99% and then to 4.49% by September, hiking mortgage payments by as much as 65%. I suspect that other Banks will follow suit in due course.
Many affected mortgage holders will be able to move to other Banks or find new deals, but a fair percentage will be unable to, due to the stricter lending criteria now in place.
It is clear that SVR's of 3% are not sustainable in the long term, and the Banks do need to go some way to repair the damage of the last four years, and by increasing the margin over and above deposits will assist in this regard. It is also possible that savers may at last get a little joy as Banks compete for deposits by offering interest rates that are a little more tempting than the last three years.
That said, from a macro-economic viewpoint, I believe these early interest rate hikes to be dangerous, and quite likely to derail the very tentative UK economic recovery. Hard pressed consumers are already faced with above inflation increases in Gas, Electricity, Petrol and food prices. Add a hike in the monthly mortgage payment in the mix, coupled with static incomes, and it is fairly evident that consumer discretionary spending may suffer as 2012 progresses.
