Markets: Retail's rickety housing-led hope

Both long-term bond rates and house prices are on the way up, which would usually translate to increased consumer confidence. But investors should exercise caution this time around.

Are we placing too much hope on rising home prices igniting consumer confidence?

Higher long term bond yields traditionally favour cyclical stocks, like retailers. The house price recovery, given life by record low interest rates, has also bred hope for retailers from revived consumer confidence those with mortgages having more cash to splash. 

Both long-term bond rates and house prices are on the way up but we haven’t seen any sign yet of this correlating with a rosier outlook for retailers.

If you are thinking the stars have aligned and now is the time for retailers you might be disappointed. Donald Williams, chief investment officer at Platypus Asset Management, doesn’t expect the next six months to be any different from the past three years for the sector.

There has been a drought of good news coming to the retail sector and it doesn’t look like this will change, with Australia’s economic growth staggering. The possibility consumer confidence may not bounce back as strongly as economists anticipate presents a shaky outlook for retailers.

Rallies among some retail stocks were intensified by those who previously bet they would go down covering short positions – not something we can count on for the next leg-up.

We can’t throw all retailers into one basket. Retailers with existing market share strength and control over their distribution channel and input costs should be favoured. If the housing recovery doesn’t have the impact on consumer confidence that is widely anticipated, focus needs to be on already resilient businesses. 

Reporting season has confirmed the quality of some niche Australian retailers – Super Retail Group and Dominos lead the way. They have both reached all-time highs this year. JB Hi-Fi is also included, edging closer to its all-time lofty heights reached on November 27, 2009 at $23.06.

This trio are each trading well above the market average of 14.2 times earnings for this financial year. Super Retail is at 18 times earnings and Dominos is at 23 times earnings. JB Hi-Fi is a little more in line at 15 times earnings. If earnings can continue growing, not necessarily at the same pace as they have over the past 12 months, these stocks will come close to justifying current price earnings ratios.

Importantly, they have proven to be robust at a time when economic conditions have been weak and consumer confidence wan.