By Grace Lagan
Investors are starting to buy back into beaten-up retail stocks, tempted by significantly cheaper valuations after soaring oil prices and higher interest rates triggered a brutal rout in the first half of the year.
Consumer discretionary stocks on the S&P/ASX 200 Index were one of just four of the sharemarket’s 11 sectors to record a positive return in the past month, adding 2.2 per cent, which quadrupled the broader gauge.
The rebound follows hot on the heels of a torrid period for retailers, as investors dumped consumer-facing stocks amid repeated interest rate rises from the Reserve Bank of Australia and a pickup in inflation that has accelerated due to surging oil prices from the Iran war.
“We’re interested in the space, but trading updates are going to be terrible in the next couple of months,” warned Oscar Oberg, a lead portfolio manager at Wilson Asset Management, which oversees $6 billion in assets. “The average investor is very underweight.”
But while Oberg expects deteriorating economic conditions to hit company bottom lines, it hasn’t stopped him from buying up retail stocks – including JB Hi-Fi, furniture retailer Nick Scali and Harvey Norman – that have been hit by heavy selling.
JB Hi-Fi has tumbled around 29 per cent so far this year, while Harvey Norman has lost 38 per cent and Nick Scali has tumbled 41 per cent.
“We’ve got to look longer term at this point in time,” Oberg said. “We’re chipping away and buying some retail because the market can change very quickly.”
The fund manager also likes Premier Investments, the owner of brands like Peter Alexander and Smiggle, which has fallen 8.2 per cent so far this year.
“There’s more pain to come: the good companies get better through these periods,” Oberg added.
Ten Cap portfolio manager Jun Bei Liu said while the outlook for consumer stocks was “getting tougher”, she liked the look of retailers that appealed to younger demographics, such as fast fashion jewellery chain Lovisa and clothing company Universal Store. Both companies are down more than 20 per cent this year.
“I think the bright spot we’ve seen continue to be strong is the youth market,” she said. “They’re not impacted by mortgages, petrol and all of that.”
“Lovisa proceeds to be a very expensive stock, but we’re certainly watching for the opportunity to enter into what is a very high-quality growth company.”
Canaccord Genuity equity strategist Greg Burke said in a recent report that “peak pessimism” in retail stocks had created a good buying opportunity. He has added Wesfarmers, which owns Bunnings, Kmart and Officeworks, to the broker’s focus portfolio.
Burke noted that analysis of previous interest rate cycles showed that when investors bought retail stocks three months before the last rate rise from the RBA, the sector returned 35 per cent over 12 months relative to the ASX 200.
Time to reassess
“Markets typically move well ahead of actual changes in policy and macro conditions,” Burke said. “The retail sector’s behaviour through previous interest rate cycles has prompted us to consider when the appropriate time may be to reassess our underweight position.”
But not everyone is convinced. Forager Funds investment chief Steve Johnson said he was not topping up his holding in UK-listed sports apparel retailer, JD Sports Fashion, even though its share price has slumped 55 per cent in the past five years.
“I’ve been doing this for 20 years, and I’ve always been a contrarian,” he said. “I’ve learned that sometimes the pessimism is justified.”
Investment banks are also wary, given the expected downturn in Australia’s housing market triggered by a series of RBA rate rises and changes to capital gains tax and negative gearing announced in the federal budget.
Morgan Stanley equity analyst Melina Baxter has downgraded the bank’s consumer industry view to “cautious”, with housing a “demand headwind” for retailers that sell more expensive goods like JB Hi-Fi and Harvey Norman.
She said those companies were particularly exposed to weak consumer confidence from falling house prices and lower turnover, which reduced move-related purchasing on items like electronics and white goods.
“Higher rates, less supportive fiscal policy, and elevated essential costs are squeezing disposable income, impacting broader discretionary spend,” she warned.
Macquarie also weighed in on the sector on Wednesday, saying it favoured relatively defensive picks, like the supermarket giants, given the looming risks to consumer spending.
“Outside of consumer staples, we look to take a long-term opportunity in price leaders with structural tailwinds,” it wrote, noting it liked the look of JB Hi-Fi.
Macquarie downgraded poultry producer Inghams to “underperform” and cut Harvey Norman to “neutral”, while retaining its bearish rating on alcohol retailer and hotel operator Endeavour Group.
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