UK Consumer Confidence Sparks Retail Recovery: Time to Rebalance Your Portfolio?

The UK’s consumer confidence index edged higher in May 2025, rising to -20 from April’s -23, marking a modest yet encouraging rebound amid persistent economic headwinds. While the index remains in negative territory, the uptick signals a turning point for investors to reassess opportunities in the retail and consumer discretionary sectors. Here’s how to capitalize on the recovery—and where to tread carefully.

The Confidence Uptick: A Fragile Rally or Sustainable Turnaround?

The May 2025 GfK survey highlights optimism in three key areas: personal finances (+5 points to +2), general economic outlook (+4 points to -16), and willingness to make major purchases (+3 points to -16). These gains were fueled by the Bank of England’s rate cut and easing trade tensions with the U.S. However, inflation surged to 3.5% in April—the highest since January 2024—and households remain squeezed, with the savings index dipping to 28. This creates a paradox: confidence is up, but spending power is under pressure.

Retail Sales: Where the Action Is

April 2025 retail sales grew 7% year-on-year, driven by Easter timing and sunny weather. Non-food categories (clothing, homeware) surged 6.1%, while food sales rose 8.2%—a sign that households are prioritizing essentials but also splurging on discretionary items like gardening gear and summer apparel. Online sales held steady at 36.4% of non-food purchases, underscoring the enduring shift toward digital retail.

Sector-Specific Plays

1. Fashion & Apparel:
   Companies like Next PLC (NXT.L) and Boohoo Group (BOH.L) are poised to benefit from pent-up demand for summer wear. Look for firms with strong online footprints and agile supply chains to navigate rising inflation and tariffs.

2. Luxury & Premium Brands:
   The luxury sector—think Burberry (BRBY.L) or Mulberry (MUL.L)—is seeing resilience. Affluent consumers, less inflation-sensitive, are driving demand for high-margin goods. Analysts project 19% earnings growth over the next three years, despite macro risks.

3. E-Commerce and Omnichannel Retailers:
   Ocado Group (OCDO.L) and Tesco (TSCO.L) (via its online grocery arm) are capitalizing on the shift to home delivery. Their stock prices have lagged in 2025, but a rebound in consumer spending could unlock value.

4. Wellness & Health:
   Wellness trends—fitness tech, organic food, and self-care—are booming. Gousto (GOUT.L) and Waitrose (WTSR.L) (owned by J Sainsbury) are capturing this niche, with premium pricing shielding them from cost pressures.

Risks to Watch

• Inflation Lingering: If the 3.5% April rate climbs further, discretionary spending could stall.
• Trade Tensions: U.S. tariffs remain a wildcard, hitting sectors like automotive and electronics.
• Savings Crunch: The savings index’s decline (to 28) suggests households are dipping into reserves, which may not last.

Investment Strategy: Be Selective, Not Aggressive

While the consumer discretionary sector has been downgraded to underweight by some strategists due to tariff risks, there are pockets of opportunity:
- Value Stocks: Focus on retailers with strong balance sheets and pricing power, like Greggs (GRG.L) (up 7.2% in May).
- Earnings Catalysts: Companies with 2025 revenue visibility (e.g., Compass Group (CPG.L), benefiting from post-pandemic travel recovery).
- Avoid Tariff-Exposed Sectors: Auto parts and tech hardware may face margin pressure.

Final Call: A Fragile Rebound, but a Buying Opportunity

The May 2025 confidence uptick isn’t a green light to go all-in—yet. But for investors willing to bet on a gradual recovery, the retail and consumer sectors offer asymmetric upside in select areas. Prioritize companies with pricing flexibility, digital agility, and exposure to wellness or premium goods. The UK consumer isn’t out of the woods, but the worst may be behind them—and that’s a bet worth making.

Act now before the recovery becomes consensus.