Hobson: ASOS Proves Why I Avoid Retailers

THE WEEK: After ASOS's profit warning, Morningstar columnist Rodney Hobson sees the UK retail rout continuing into 2019 

Rodney Hobson 21 December, 2018 | 12:45PM
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When directors put their money where their mouth is, it is supposed to be an indication of confidence in the company that other investors should follow. Online fashion retailer ASOS (ASC) could be an exception. The buying of shares by the chairman and chief executive has a look of desperation about it.

The top two splashed out £100,000 each the day after ASOS issued a profit warning that sent the shares down 37.5%. To no avail. Although the shares initially rebounded 4% on the directors’ buys they were adrift again before the day was out and they slipped another 12% the following day.

ASOS, for years one of the highest fliers on the London Stock Exchange, has now fallen from £77.30 in March to below £23, a drop of 70% in just nine months. The key trading month of November, when sales should have been building up for Christmas, was way below par in terms of revenue and margins.

The position was sufficiently serious for ASOS to bring out an unscheduled trading update. It means full year profits to the end of next August will be about £52 million, less than half previous guidance and just over half the previous year’s figure.

Clearly the travails of the High Street have spread to the internet, perhaps inevitably so. Pay in the UK may be edging above inflation but years of squeezed wages are at last taking their toll. I just do not see any relief for retailers any time soon. I have avoided the sector for quite some time. That stance will not be changing any time soon.

FTSE 100’s 8,000 Points Remains Elusive

A year is a long time in investing. We began 2018 in a spirit of some optimism and when the FTSE 100 hit 7,877 points on 22 May it seemed just a matter of time before my forecast of 8,000 points some time during the year would come to pass. It is now clear that, barring a miracle, we shall not manage 7,000 at year end.

The outlook now is somewhat less rosy. Time is running out for a Brexit deal that is acceptable to the European Union and the House of Commons, US President Donald Trump’s make-it-up-as-you-go-along policies are disrupting world trade and the Eurozone is no longer outpacing the sluggish UK in terms of economic growth. This week the Federal Reserve Bank indicated that growth in the US is easing and therefore it may not be possible to raise interest rates quite so rapidly.

It's possible to cling to straws, such as arguing that after recent falls in stock markets across the world valuations are more attractive while global economic growth is still likely to be better than 3%, which should feed through into higher company profits.

Some commentators argue that the world’s financial system is in better condition than it was at the time of the last big downturn 10 years ago. It is true that banks and other financial institutions have significantly improved their balance sheets but governments have seen debt levels rise to even more worrying levels than in 2008 and are thus in less of a position to mount any rescue acts.

My view is that markets have further to fall but I am staying fully invested because bear markets tend to be fairly short – the three-year millennium slide was unusually long. You never know, something may come out of the Brexit chaos that is broadly acceptable to the markets, in which case you don’t want to be left behind.

And maybe I will be proved wrong, as I was this year. The FTSE 100 will hit 8,000 points sooner or later. I want to be there when it happens.

And with that thought I wish all readers a merry Christmas and a happy New Year. As usual there will be no column for the next two weeks but I will be back on January 11.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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