As well as directing his wife to put 90% of her bequest into a low-cost index fund that tracks the S&P 500 when he dies, Warren Buffett allegedly used to get investment ideas by watching what she spent money on in shops. Mrs Buffett’s budget is presumably ample, and so her buying habits may not tell us much about where to put our money in these peculiar times, but keeping a weather eye on less well-heeled consumers’ shopping trolleys could be investment gold.
We live in what might be called the Age of Front. Politicians tells us that everything is fine when patently it is not. The US presidency is in the hands of a petulant madman with an apricot soufflé on his head who cannot get his legislative programme passed. The European Union (EU) is spending light years of its officials’ time negotiating with a naysayer state whose representatives won’t say what they want and don’t remember to bring a pen and paper to meetings.
Of course, we shouldn’t talk the US and UK down, but it is hard to see how they and the rest of the developed world are going to thrive. Indeed, investors are increasingly turning to emerging markets where they at least get paid to take political risk. But we cannot put all our money in emerging markets. Even if we throw aside diversification, there aren’t enough stocks to go around. Enter the shopping trolley.
Speaking personally, and marooned as I am in Fortress Britain, I don’t feel things are going all that well. Therefore, I have tightened my belt. I pick flowers instead of buying them. I darn jumpers instead of throwing them out. I walk the dog myself instead of getting in a dog walker. I buy clothes from the supermarket rather than from fancy boutiques.
I concede that some of these actions are not investable. But some of them are. Thread. Wool. Buttons. Bottom-of-the-range supermarkets. Dog leads. Or how about lipstick?
Lipstick is not necessary but it is nice, and it doesn’t cost that much. In other words, it’s an inexpensive luxury. Phil Harris, manager of the Eden Tree UK Equity Growth fund, suggests we are in the grip of the ‘lipstick effect’ – a phenomenon whereby consumers facing economic hardship are more willing to buy inexpensive luxury goods.
Cosmetic sales thrived during the Great Depression, and the US beauty sector grew in the 1990 and 2001 recessions. Data from RAB Capital show that the European personal products sector outstripped the broader market by 100% on average in the recessions of the early 1980s, early 1990s and early 2000s. “I believe we will now see the effect accelerate, as consumers forego big-ticket purchases, such as furniture items or new cars, while maintaining or increasing expenditure on less expensive discretionary spending items,” says Harris.
The lipstick effect works best when interacting with other trends. These include ‘the evolving hierarchy of needs’, whereby items once considered luxuries, such as coffee and chocolate, are now considered necessities, and the ethical consumer trend. They have collided spectacularly in Fever Tree tonic water, whose share price has hit record highs.
“Fever Tree is a radial market disrupter of the beverage mixers market,” says Harris. Fever Tree is more expensive than Schweppes but has better ingredients. Harris believes it still has huge growth potential. I’ll tell you something else: it was in my shopping trolley only the other week.
Fiona Rintoul is editorial director at Funds Europe
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