The Bank of England and other financial monitors have been concerned for some time by the UK’s ballooning consumer debt bubble. Household debt is at unprecedented levels — a staggering £1.6trn.
According to a report from the National Audit Office, up to 8.3m people are unable to pay off debts or household bills. And the situation is only getting worse, with figures from the Office for National Statistics showing Britons spending an average of £900 more than they earn each year.
Today I’m looking at which FTSE stocks could crash, if the UK consumer debt bubble bursts.
Safe as houses?
Lenders are the obvious place to start. Mortgages represent the lion’s share of household debt, so UK-focused banks with large mortgage books — Lloyds and Royal Bank of Scotland— are potentially vulnerable, as are challenger banks, such as Virgin Money and Paragon, which have been aggressively growing their mortgage books.
I say ‘potentially vulnerable’ because, in the words of Warren Buffett, “you only learn who has been swimming naked when the tide goes out.” If the consumer debt bubble bursts, some lenders’ underwriting standards and affordability assessments will prove to have been inadequate.
We’d likely see a severe tightening of lending criteria. If mortgage availability were to plunge, the FTSE 100‘s housebuilding giants, Barratt, Persimmon and Taylor Wimpey (as well as smaller peers, like Bellway, Berkeley and Redrow)could see demand fall off a cliff.
The Bank of England says unsecured debt (credit cards, short-term loans, etc) has hit a record high of £214bn — “far outstripping the personal debt mountain that preceded the 2008 economic crash,” according to The Times. Bloomberg recently reported that Barclays‘ chief executive Jes Staley isn’t too worried about the risks of Brexit and a US-China trade war, as reaching for his Barclays credit card, he says that it’s such cards that are “the biggest risk in the bank.”
Car finance packages, which now fund four in five new car purchases (up from one in five in 2006) are another significant area of risk. The big banks have exposure here too, but there are also smaller specialists in the field, such as S&U and PCF. The prospect of a flood of drivers returning their cars and walking away from the rest of their loans would be bad news not only for lenders, but also for car dealers, already struggling with other issues, like Vertu, Lookers and Pendragon. Indeed, the consumer discretionary sector in general would be vulnerable, particularly companies like DFS Furniture, which relies heavily on being able to offer customers interest-free finance.
Buy, buy, buy!
Personally, I see the UK household debt bubble, and the consequences of it bursting, as too serious to ignore. As such, I’m avoiding the stocks I’ve mentioned in this article. However, there is a counter-argument from a more sanguine perspective that these are exactly the stocks investors should be snapping up right now.
The balance sheets of banks and housebuilders are stronger than ever and all the companies mentioned have low forecast earnings multiples, providing investors with a ‘margin of safety’. S&U, PCF and DFS are on double-digit multiples, but below the FTSE 100 long-term average of 14, while every other company mentioned is on a single-digit rating, some as cheap as half that of the Footsie long-term average. I’ve almost tempted myself … but not quite.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Lloyds Banking Group, Pendragon, Redrow, S & U, and Vertu Motors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.