Don’t be fooled by the UK’s doomsday preppers

One of the latest trends to make the crossover from the US to the UK is ‘doomsday prepping’, in which ‘survivalists’ stockpile everything they need to see them through the breakdown of civilisation.  

Justin Jones, who runs the online UK Prepping Shop, recently told the Guardian¹ he received a huge bump in sales when Russia invaded Ukraine, selling out “like mad on gas masks, nuclear protection stuff, potassium tablets. We did a month’s trade in a day and a half.” 

Another retailer interviewed for the same article said that when the invasion started, “people were buying crossbows faster than I’d like”. 

It’s easy to laugh at the thought of someone living underground, eating beans straight out of a can with only their crossbow for comfort. But as small-cap managers, it sometimes feels like everyone else in the UK is taking the ‘Chicken Little’ approach, readying themselves for an impending economic apocalypse when actually… things look OK.  

Is UK debt really unsustainable? 

Hans Rosling’s 2018 book Factfulness described human beings’ natural inclination towards pessimism and our habit of overlooking good news in favour of anything that confirms our negative bias. The press undoubtedly contributes to this mindset, with the mantra of “if it bleeds, it leads” setting the agenda.  

We believe this way of thinking is behind the current focus on UK government debt, which is something of a red herring for investors. News released on 2 September that UK government bond yields (which have an inverse relationship with prices) hit their highest levels since 1998² led to claims that UK borrowing was out of control. This narrative had little trouble gaining credibility and the FTSE SmallCap index fell by 1.2% on the day³.  

Yet it seemed to ignore the fact that at 104%, our debt-to-GDP (gross domestic product – a measure of economic health using the total value of goods produced and services provided in a country during one year) ratio is lower than that of France (116%), the US (123%) and Japan (235%)⁴. Since 2 September, gilts have rallied⁵.  

We are expecting an increase in negative headlines in the run-up to the Budget, which could affect confidence and therefore consumer spending in the short term. But ultimately consumer spending is dictated by the fundamentals, and we think the fundamentals look solid.  

Beating expectations  

Just two weeks before the jump in gilt yields came the news that GDP had outpaced expectations in Q2, making the UK the fastest growing G7 economy in the first half of the year⁶.  

This correlates with what we are seeing at the individual company level. Yes, some of our consumer holdings, such as Halfords, Wickes (which sells garden furniture) and the pub operators have benefited from the warmer weather. But how do you explain strong trading at DFS?⁷ What have sofas got to do with sunshine? 

Meanwhile, household debt (as a percentage of gross disposable income) is at its lowest since the late ‘90s⁸. And at about 11%, the savings ratio is more than twice its pre-Covid level⁹.  

The key figure  

For us, that savings ratio is the key figure, as a rainy-day fund of this size should help limit the impact of any downturn. But more interesting to us is what happens if we see an increase in confidence and people start spending money rather than saving it.  

Consumer spending accounts for 60% of GDP¹⁰. For every 1 percentage point decrease in the savings rate, we would expect an increase in spending of £15bn¹¹. The impact of even a return to normal levels of saving would be enormous. 

So, what could cause confidence to increase? It’s difficult to pinpoint a single reason, but we have found that what has tended to happen in the past is that people just get bored. Even the most pessimistic prepper eventually climbs out of their hole.  

The ‘each-way bet’ on UK small caps  

But even if this doesn’t happen and economic growth remains moribund, low valuations in UK smaller companies mean takeovers and share buybacks should continue to drive returns, just as they have done over the past decade¹².  

This each-way bet helps to explain why we think there could be a pre-Budget buying opportunity in the sector and have substantially increased our personal stakes in the Artemis UK Future Leaders plc as a result. Despite the negative narrative surrounding the UK, we think it’s a much better bet than a crossbow.  

Risks specific to Artemis UK Future Leaders plc investment trust:

Currency risk: The fund’s assets may be priced in currencies other than the fund base currency. Changes in currency exchange rates can therefore affect the fund's value.

Market volatility risk: The value of the fund and any income from it can fall or rise because of movements in stockmarkets, currencies and interest rates, each of which can move irrationally and be affected unpredictably by diverse factors, including political and economic events.

Income risk: The payment of income and its level is not guaranteed.

Smaller companies risk: Investing in small companies can involve more risk than investing in larger, more established companies. Shares in smaller companies may not be as easy to sell, which can cause difficulty in valuing those shares.

Counterparty risk: Investments such as derivatives are made using financial contracts with third parties. Those third parties may fail to meet their obligations to the fund due to events beyond the fund's control. The fund's value could fall because of loss of monies owed by the counterparty and/or the cost of replacement financial contracts.

Charges from capital risk: Where charges are taken wholly or partly out of a fund's capital, distributable income may be increased at the expense of capital, which may constrain or erode capital growth.

Leverage risk: The fund may operate with a significant amount of leverage. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested. A leveraged portfolio may result in large fluctuations in its value and therefore entails a high degree of risk including the risk that losses may be substantial.

Important information

This is a marketing communication. Before making any final investment decisions, and to understand the investment risks involved, refer to the Investor Disclosure Document, Articles of Association and KID, available in English, from the relevant fund page or literature section on www.artemisfunds.com. The documents can also be found on www.fundinfo.com.

CAPITAL AT RISK. All financial investments involve taking risk and the value of your investment may go down as well as up. This means your investment is not guaranteed and you may not get back as much as you put in. Any income from the investment is also likely to vary and cannot be guaranteed.

Investment in a trust concerns the acquisition of units/shares in the trust and not in the underlying assets of the trust.

Any research and analysis in this communication has been obtained by Artemis for its own use. Although this communication is based on sources of information that Artemis believes to be reliable, no guarantee is given as to its accuracy or completeness.

Past performance is not a guide to the future. Performance does not take account of any costs incurred when investors buy or sell the fund. Returns may vary as a result of currency fluctuations if the investor's currency is different to that of the class. This class may have charges or a hedging approach different from those in the IA sector benchmark.  

Reference to specific shares or companies should not be taken as advice or a recommendation to invest in them.

Any forward-looking statements are based on Artemis’ current expectations and projections and are subject to change without notice. 

Third parties (including FTSE and MSCI) whose data may be included in this document do not accept any liability for errors or omissions. For information, visit www.artemisfunds.com/third-party-data.