The UK has high inflation and unemployment, sluggish growth and squeezed household budgets – but it is still a good time to buy retail stocks selectively in the country, says Paul Mumford, senior fund manager at Cavendish Asset Management.

The dire economic environment in the UK has hit companies' balance sheets and pushed down equity prices, and thereby created opportunities as well as traps: “At some stage, the economy will pick up and customers will start spending again, which will give you the icing on the cake, but in the meantime prices are reflecting good value,” Mumford says.

“What classically happens is that the stock market will anticipate events, but the companies will recover before the actual market recovers.”

“If you take someone like Marks & Spencer, people could not buy enough of them when the price was £7 ($10.8), and now it’s down at £3.20-level,” he says. “And not only that, but they have also decent yields, more than you are getting from the bank.”

Mumford is also positive about Debenhams, which he believes has successfully adapted to the trend of online shopping. This trend has meant that HMV and Game Group are struggling and have become “traps in the segment”.

Clothing and food

Despite high-profile casualties such as Peacocks and Black Leisure, Mumford highlights the strength of clothing companies: “I think the companies that have done well are the ones that have got the right products and are fairly innovative; if you look at someone like Supergroup, which has been flying off the shelves,” he says. “Asos [an online clothing company] also had its figures recently and they were pretty good. Younger people have more money in their pocket and they will spend on fashionable clothes.”

Like “the Sage of Omaha”, Warren Buffett, Mumford is also a fan of Tesco: “Having been knocked back as much as it has after a fairly disastrous Christmas, Tesco would represent good value on five-year yields,” he says. “It is the leader in the marketplace in the UK and has also exposure to the Far East.”

However, investors should tread with caution; the retail sector has seen better days, although the Christmas trading was somewhat better than expected. Retailers had braced themselves for what was anticipated to become the toughest Christmas trading since the peak of the credit crunch. In the event, UK retail sales in December were 2.2 per cent higher than in 2010, when sales had fallen 0.3 per cent, according to the British Retail Consortium.

This, however, does not mean that the high street is out of the woods yet: “You have to take short-term fluctuation in prices into account, but I think that the downside, unless you are in a poor company, is much more limited and the upside is far greater,” Mumford says.

“You have to buy on a medium-term view, but in a year’s time, who knows, things might have recovered. But even if it has not recovered, a lot of these retailers will trade reasonably well,” he continues. “Over a five-year period, you are likely to see a 50 per cent rise or doubling of money, and in the meantime you are sitting on decent yields.”