Is retail a buy?

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Myer’s Bernie Brooks is in dour mood again today. From the SMH:

The current economic conditions are a “tale of woe” and the worst he has ever seen, Myer chief executive Bernie Brookes says.

Speaking today at a business lunch in Melbourne, Mr Brookes said the easy moves of cutting costs have gone and that businesses were struggling to stay ahead of the broader economic downturn.

“It’s a very different market,” Mr Brookes told a Deloitte lunch today at noon.

He reiterated pervious forecasts saying he expected Myer’s full year profit to be down as much as 15 per cent this year, with the department store owner hitting some tough trading conditions this year.

As you may have seen, Deloitte is also out with a report today that sees a forthcoming bounce in retail activity on stimulus and rate cuts. From AAP:

Deloitte Access Economics is forecasting real – or inflation adjusted – retail sales to grow by three per cent in 2012/13, up from an expected two per cent in 2011/12, and after 0.7 per cent in 2010/11.

Interest cuts by the Reserve Bank of Australia (RBA) in November and December last year helped to lift spending in the early part of 2012, and the central bank has since cut the official cash rate by a further 75 basis points.

“Markets have been betting on more rate cuts through the remainder of 2012,” Deloitte Access Economics director David Rumbens said in the forecaster’s quarterly retail report released.

“Those cuts will free up a substantial chunk of disposal income.”The May 2012/13 federal budget also included a number of measures to boost the economy, notably payments for school-age children and extra welfare spending.

Mr Rumbens said the “cash splash” was likely to support retailing in the short-term, although some payments were effectively one-offs, while others would be offset by cost of living increases.

He also noted wages growth was picking up, which may help sustain retail growth at a reasonable level over 2012 and 2013, while employment growth was expected to improve modestly in the next year.

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I don’t disagree with this analysis, though the key phrase is “short term” bounce. As I argued recently, rate cuts and rate cut jawboning has been greeted with pops in consumption:

The yellow line tracks retail sales month on month. The first circle was the bounce following Bill Evans’ breaking of the bullhawkian inflation panic in July last year and the second is following the Nov/Dec rate cuts. But note that both faded quickly in the new normal of household conservatism, which I expect absolutely to continue.

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A quick examination of the ASX’s consumer discretionary and staples indexes is also informative. First is five year chart:

As you can see, neither index has gone nowhere since the GFC. At least, not in sustainable bull market sense, following a good bounces out of the event itself. Since then discretionary stocks have been in a large downtrend whilst staples predictably are going sideways. But the movements between the two indexes shows regular sectoral rotation and if we look at the past year it is more clear what I mean:

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Note the big bounces following the Bill Evans moment and then again after rate cuts and during the LTRO rally of the first quarter. Of course, staples lead in periods of uncertainty such as now and discretionary leads as conditions ease.

A similar rotation will present itself if Europe can kick the can again in the next few weeks with staples likely to give way again to discretionary plays. Sadly, there are no ETFs for these indexes. But the staples to indexes by market cap are as follows:

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Staples by market cap;
Wesfarmers Ltd
Woolworths Ltd
Coca-Cola Amatil Ltd
Metcash Ltd
Treasury Wine Estates Ltd
GrainCorp Ltd
Goodman Fielder Ltd
Discretionary by market cap:
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Crown Ltd
Tatts Group Ltd
Echo Entertainment Group Ltd
TABCORP Holdings Ltd
Harvey Norman Holdings Ltd
Flight Centre Ltd
Sky City Entertainment Group Ltd
Aristocrat Leisure Ltd
Navitas Ltd
Sky Network Television Limited.
Seven West Media Ltd
Fairfax Media Ltd
Super Retail Group Ltd
David Jones Ltd
Myer Holdings Ltd
About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.