Survival of the fittest

17th September 2012

The £300m Rutland Gate house may be an anomaly, but it shows the buoyant state of the London housing market: " The property market in central London has been living in its own bubble for many years, and that has expanded rapidly in the past few years.

"House sales there are dominated by very rich foreigners, many of whom have been moving their money from economically troubled areas of the Eurozone to London, looking for a safe haven investment.

"Knight Frank calculates that what it calls "prime" central London property prices have gone up by 50% since March 2009."

In contrast, Steve Morgan paints a very different picture of the housing market further down the scale: He says that over-regulation of the banks is creating poor mortgage availability. Equally, draconian planning regulations are damaging the housing market outside London.

Retail

A similar picture is seen in retailing. Take the contrasting fortunes of two established British brands – John Lewis and M&S. John Lewis saw sales rise 8.6 per cent to £3.9bn for the half year to the end of July. Apparently unaffected by the bad weather, John Lewis was a key beneficiary of the official celebrations around the diamond jubilee and the Olympics, to which it was the official department store.

Although M&S blamed weak trading conditions, analysts cast doubt on their interpretation: "Neil Saunders, managing director of Conlumino, said: "Overall this is a very weak set of numbers that is explained only in part by poor trading conditions on the high street; the rest of the explanation comes down to issues that are specific to M&S … Moreover, the results for general merchandise are set against comparatively subdued numbers last year demonstrating that M&S has gone from a position of standing still, to one of moving backwards."" The departures of senior staff suggest the M&S directors secretly agree.

A similar picture is seen across the high street – JJB Sports is struggling, in contrast to competitor Sports Direct: "The gulf between the high street's biggest sports retailers has widened after loss-making JJB Sports said it was once again running out of cash, while rival Sports Direct is set to hand a £24m bonus to its billionaire founder Mike Ashley and pay its 2,000 staff a bonus averaging £15,000 each for hitting growth targets after record sales."

A number of things define 'strength' in this environment, whether it is in the housing market or the high street. Cash is a valuable asset. This 2008 piece for Forbes now seems prescient: "Those with the deepest pockets can afford to really ratchet up the pressure on competitors in a downturn." – John Lewis can afford to ensure it is best positioned to take advantage of the Olympics and Jubilee, for example. Poor cash flow has been the undoing of JJB Sports – net debt at the group has increased £2.3m to nearly £18m since a profit warning in June. Those in the property market who need to borrow are thwarted by banks' reluctance to lend, while the top end of the market is a safe haven for cash buyers.

Equally, 'strength' is self-reinforcing. The London property is a safe haven because, well, it's been a safe haven in the past. There is plenty to suggest that the UK economy is as weak as any other in Europe, yet London has created its own myth.

What can we learn from Darwin

Overall, this may be seen as capitalism's natural Darwinism at its most acute. In a buoyant economic climate, everything does well, but – to paraphrase Warren Buffett – when the economic tide goes out, it is clear those companies that are swimming naked, supported by wide availability of debt. This blog points out, admittedly anecdotally, how discernment has made a comeback during the recession: "(there is) a changing mindset towards commodity goods. I've noticed far more private-label products on store shelves, which would lead me to believe people have finally taken notice to the fact that $6 Motrin is no different than $2 ibuprofen."

This blog talks about the opportunities that this Darwinism can present, specifically in the digital world. "At this rate of change it will become the norm for companies to blossom, grow quickly and die – all in a period of less than 10 years… The answer, as ever, is the ability to evolve and adapt to new market conditions and technologies. So, get your brain working and think of new ideas; ideas that people might want. Today is a great day for a new start."

Investors have already cottoned on to this trend and have been willing to pay a high price for quality and/or innovation and organic growth. Perhaps more importantly, investors should be wary of the weakest. In this environment, dead cats can bounce, but not high and not for long.

 

More on Mindful Money:

What is the debt situation in the UK?

How has the financial landscape changed s
ince 2007?

What is really happening to the UK economy?

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