UK Equities: Positioning for Cyclical Recovery in Consumer Discretionary and Industrials

The UK economy’s nascent rebound, marked by a 0.2% GDP growth in Q1 2025, signals a turning point for cyclical sectors poised to benefit from rising consumer and business confidence. While the recovery remains uneven, with manufacturing still grappling with headwinds, opportunities abound in consumer discretionary and industrials. This article outlines strategic investments to capitalize on the upswing while navigating risks.

Consumer Discretionary: Riding the Retail and Travel Recovery

The services sector’s 0.4% contribution to GDP growth highlights a consumer rebound. Retail trade (excluding motor vehicles) surged 1.7% in January 2025, driven by food and non-essential purchases. This bodes well for Tesco (TSCO) and Sainsbury’s (SBRY), which are well-positioned to capture pent-up demand in groceries and general merchandise. Both stocks trade at P/E ratios below their five-year averages, offering value amid improving sales trends.

In travel and leisure, the S&P Global/CIPS Services PMI at 51.5 in March 2025 underscores renewed demand. Airlines like International Consolidated Airlines Group (IAG) and travel platforms like Expedia Group (EXPE) (via its UK operations) stand to gain as business and leisure travel recovers. A reveals undervaluation relative to pre-pandemic levels, despite strong bookings data.

Risks to Watch: A 4.5% annualized inflation rate (CPIH) threatens consumer purchasing power. Companies lacking pricing power or exposed to discretionary spending (e.g., luxury goods) face margin pressures. Monitor wage growth trends closely—5.6% annual growth in March 2025 still lags inflation, squeezing disposable income.

Industrials: Betting on Manufacturing Resilience and Infrastructure

While manufacturing output fell 0.9% over three months to January 2025, select sub-sectors show promise. Transport equipment manufacturing rose 2.7% in March, driven by demand for commercial vehicles and machinery. Rolls-Royce (RR.), despite its legacy challenges, is a play on aerospace recovery, while Meggitt (MGGT) benefits from rising defense and energy sector orders.

Construction’s 0.4% quarterly growth, fueled by public infrastructure projects (+9.3% in public “other new work”), points to opportunities in materials and engineering. CRH (CRH), a leading construction materials firm, is well-positioned to supply the UK’s £350bn National Infrastructure Strategy. A highlights its stability and income appeal.

Risks to Watch: Manufacturing’s PMI contraction to 44.9 in March—a 17-month low—reflects lingering cost pressures (e.g., energy, metals) and trade tensions. Companies exposed to global supply chains, such as semiconductor manufacturers, face headwinds from US tariffs and geopolitical instability.

Tactical Overweight: Why Now?

The composite PMI’s stabilization and services sector’s strength suggest cyclical upswing momentum. Business investment rose 5.9% in Q1 2025, signaling renewed corporate confidence. For investors, this is a “buy the dip” moment in cyclicals, as valuations remain depressed relative to growth peers.

Key Picks:- Consumer Discretionary: Tesco (TSCO), Sainsbury’s (SBRY), IAG (IAG)- Industrials: CRH (CRH), Meggitt (MGGT), Rolls-Royce (RR.)

Mitigating Inflation Risks

Prioritize companies with pricing power and diversified revenue streams. Tesco’s cost-cutting initiatives and CRH’s inflation-linked contracts reduce vulnerability. Avoid over-leveraged firms or those reliant on discretionary spending (e.g., luxury retailers).

Conclusion: Act Now Before the Rally Accelerates

The UK’s cyclical recovery, though fragile, is gaining traction. With consumer discretionary and industrials offering compelling valuations and sector-specific tailwinds, investors should tactically overweight these areas. Monitor PMI data and wage-inflation dynamics closely—any further PMI improvement or wage slowdown could trigger a surge in cyclicals. As the old adage goes: “The best time to plant a tree was 20 years ago. The second-best time is now.”

Invest wisely—cycle up before the market does.