The chief executives of both Wm Morrison and Mothercare spoke yesterday of their caution over prospects for consumer spending in Britain. They were not the first to give this warning and they will not be the last.

Investors who want exposure to the retail sector - many are shying away altogether - need to determine which operators are selling goods to a market that feels it has to spend regardless of the consumer climate.

Food retailing may be the first defensive retail stock to spring to mind. That should tick the box for Morrison, Britain’s fourth-largest supermarket, which has stuck resolutely to being a grocer and made low prices its big selling point.

A trading update from Morrison yesterday seemed to confirm the theory. Like-for-like sales rose 3.7 per cent over the 14 weeks to November 4. The pace of growth accelerated to 4.4 per cent over the past seven weeks, though this coincided with the heightened economic unease felt by shoppers since the demise of Northern Rock.

Running a close second for a defensive retail stock would be a company looking to sell affordable goods to help mothers and mothers-to-be – not forgetting doting fathers, uncles and aunts – to kit out their kiddies.

That should tick the box for Mothercare. Half-year figures out yesterday point to a core business that is coping well even as consumers tighten their belts.

In more straitened times, parents may cut back on spending on their own clothes – witness the recent hard times at Next or French Connection. However, Mothercare’s like-for-like UK sales rose 2.8 per cent over its half year to October 28.

Investors should not be deterred by a 52 per cent slump in group pretax profits at the half-year mark, The fall was down to previously revealed one-off costs relating to the acquisition of Early Learning Centre. The management confirmed that the business is on course for a full-year profit once the Christmas upswing gets under way.

Mothercare also benefits from an expanding overseas network – 472 stores in 46 countries. This gives the group access to Eastern Europe, China and India, where the rapidly growing middle classes have ensured that consumer confidence is still sky high. International sales rose 24 per cent and now account for nearly a third of group sales.

There is always the worry that Mothercare will face increasing competition from the big supermarkets as they expand into nonfood items, especially clothing.

But with Mothercare’s depth of product and presence, this specialist retailer should weather the storm, The company has no borrowings and management’s confidence is shown by a 12.1 per cent rise in the interim dividend to 3.7p. Mothercare shares added 5p to 369¾p yesterday. This is down from a year’s high of 434p but it has still outperformed the retail sector.

The shares trade at about 13 times expected earnings next year. This is a premium to the clothing sector but the defensive nature of Mothercare’s offering and its international growth prospects justify holding on.

Morrison shares gained 22½p yesterday to 293½p. They now trade at a premium to its larger rivals Tesco and J Sainsbury. Morrison has, however, stuck to food, the most nondiscretionary item on the weekly supermarket shop. Net debt will be reduced by £200 million to £700 million by January, ensuring that its costs are under control as revenues rise. Hold.

Severn Trent

It may seem strange that when Britain’s second-biggest water company admits that it faces a criminal prosecution from the Serious Fraud Office its shares bounce nearly 6 per cent. That happened yesterday to Severn Trent, relating to its alleged misreporting of data on leaks to Ofwat, the water regulator, between 2000 and 2002.

The company now risks hefty fines imposed by the courts on top of any fines levied by Ofwat itself. The regulator has the power to fine up to 10 per cent of regulated turnover, meaning the firm could be fined £120 million. But Ofwat is holding off until it sees the outcome of the SFO case.

Severn Trent had been trading at a discount to the water sector because of the uncertainty surrounding the fines. Investors may now be sure that there will be fines but the final quantum remains a guessing game. This month Ofwat fined Southern Water £20 million for misreporting. Betting that Severn faces £50 million of fines – reflecting the relative company sizes and their wrongdoings – is just that, a bet. At £14.66, Severn Trent shares are 300p above this year’s low. Take profits.

Imperial Innovations

Investing in so-called green technology can be high-risk if it involves pouring money into one company that may be working on just one product. Imperial Innovations, 60 per cent owned by Imperial College, London, looks to spread the risks by acting as a technology incubator. It has a portfolio of investments in more than 70 companies, many spawned out of ideas generated in the college’s labs.

Imperial saw £30 million of its new shares, sold at 370p a month ago, start trading yesterday. At the same time £1.5 million was raised from investors, including Imperial, for i2India, a venture company in which it has a 35 per cent stake. I2India also looks to create businesses out of ideas from local universities.

I2India may not generate returns for a while but Imperial can wait. It has plenty of cash and income – £5.1 million last year from licences and consulting advice – and a spread of investments. Imperial’s shares shed 2½p to 372½p, but that was still above the price of its latest fundraiser. Buyers with patience to hold could reap benefits.

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