Retailers bounce on optimism

Legendary investor Warren Buffet famously said the way to make money is to be "fearful when others are greedy and greedy when others are fearful".

It's easier said than done, of course. But the advice certainly holds true when looking back at which parts of the stock market have fared best in the past year.

For all the interest in bank share prices, the biggest share price gains have occurred in a much weaker part of the economy: discretionary consumer stocks.

There are plenty of challenges facing these companies, from increased household thrift to the rise of online shopping. Yet despite these headwinds, the index of ASX 200 consumer discretionary stocks had risen 35 per cent in the past year.

And I'm not talking about "consumer staple" retailers that are hard to avoid like Woolworths or Coles, but shops with less essential goods, such as JB Hi-Fi or Harvey Norman. JB Hi-Fi, it has been one of the prime targets for "short sellers" but JB Hi-Fi shares are up a whopping 98 per cent in the past year.

So how have discretionary retailers enjoyed such a strong run? Experts say the main reason for the sector's strong performance is a hope things will improve, rather than a serious lift in earnings.

Even though households are still cautious with their spending, there are growing signs they are responding to lower interest rates.

AMP Capital chief economist Shane Oliver says the "wealth effect" suggests the recent house prices surge will lead to more of us buying non-essential goods and services.

"There will eventually be a pick-up in retail sales because house prices are going up, wealth is also going up, and this will lead to higher spending at some point," he says.

Argo Investments senior investment officer Chris Hall says share prices of consumer discretionary stocks have jumped in anticipation of higher household spending.

The bounce in house prices and lift in consumer confidence suggests spending should improve further, he says. But it's too early to say whether this would justify the strong share price gains experienced so far.

"The Christmas period is going to be critical for the sector, to see what the true structural momentum is going into 2014," he says. The big question for investors is whether the nascent signs of a retail recovery translate into a serious expansion in household spending. And on this front, things are still quite uncertain. The federal Treasury remains concerned that unemployment will rise.

So while people who bought consumer retail stocks a year ago have done well, there's no guarantee the run can continue.