The UK economy is growing at a fast clip, with an increase of over 22% in the second quarter from last year. This is the first time in six quarters that year-on-year growth is visible. This indicates that the recovery from the pandemic is well underway.
The contribution of wholesale and retail trade to growth is notable this quarter. This is because of the “response to the re-opening of indoor hospitality, Euro 2020 and the reopening of non-essential retail”, as per the Office of National Statistics.
Trading stocks to consider
FTSE 100 and FTSE 250 retailers, pubs, and restaurants have already seen a run-up in share prices in anticipation of better times even before the lockdowns lifted. FTSE 100 clothing and accessory retailers and brands like JD Sports Fashion, Next, and Burberry, for instance, showed a fast pick up last year itself. It is quite likely that they can continue to do so over the next year as well.
But right now, I am most carefully looking at three pub stocks – Marston’s, JD Wetherspoon, and Mitchells & Butler. Not only did these companies suffer a setback from the corona crisis, their share prices have not seen the kind of recovery that has been witnessed by, say, FTSE 100 non-essential retailers.
Growth and (possibly) lower taxes
These companies’ financials still look quite challenged, but they can improve considering that we have found our ‘freedom’ again. This is already showing up in the economy-wide numbers for trade in the April-June quarter this year. Marston’s seconds ONS’s views on the role of Euro 2020 in driving better performance. It has also mentioned warm weather and the option of outdoor seating as reasons for it.
Pub operators are also lobbying for more tax relief from the government. Value-added tax (VAT) for such establishments was slashed from 20% to 5% last year, but is expected to rise up to its original rates next year. However, the industry wants a permanent relaxation in VAT now, which can help them get their financials back on track.
Also, as per Tim Martin, Founder and Chairman at JD Wetherspoon, the return of VAT will mean that hospitality companies will have to pass on price increases to customers from October onwards, when they are increased to 12%. Moreover, it makes the industry uncompetitive compared to supermarkets, according to him. Supermarkets saw an upturn in fortunes last year as the pandemic forced us to stay at home and buy more food and other household goods.
Right now, though, what happens next on tax changes is up in the air.
Would I buy pub stocks now?
The economy numbers, along with reports on pubs performance give me hope, however. Realistically, it may be some time before they go back to their pre-pandemic financial health. At the same time, I think recovery will be increasingly visible in their numbers through the year. They are on my watchlist.