Economic recovery should improve consumer confidence and lead to a better performing but polarised r...
Economic recovery should improve consumer confidence and lead to a better performing but polarised retail sector.
In Japan, the retail sector has underperformed the market from 1 January to 10 May. Over this period the market was down 1.1% in yen terms, while the retail sector fell 13.8%.
Despite this, Stewart Ivory is positive on the sector, although Japan fund manager Anja Balfour believes it is highly polarised in terms of the types of retailers and quality of stocks. There is currently lacklustre consumer spending even though retailers are benefiting from the recovering economy to some extent. One of the major catalysts for the unexciting consumer confidence is the corporate restructuring and associated uncertainty about employment, she says.
Yet there is likely to be a positive trend with second generation baby boomers growing up and spending, Balfour adds. Consumer confidence should pick up in the second half of the year once profits from corporate restructuring appear and people feel more confident at work.
Balfour also expects a fillip in spending with ¥100 trillion of 10-year postal savings accounts starting to mature this year. Stewart Ivory expects most of this money to be rolled over into other accounts, although it forsees a boost in consumer spending too.
She says the subsectors performing well include communications, due to growth in mobile phone usage and the introduction of internet phones. Leisure and cars are other major beneficiaries of the recovery.
Mainstream merchandise companies, such as Ito Yokada are lagging. Balfour says that like Britain's Marks & Spencers, the company has lost direction in terms of its merchandise.
She says: "On the flip side, a small retailer called Right On has an incredible demand. Its focused fashion items are increasingly popular."
Retailers such as this are currently undervalued. She says: "A company like Shimachu is trading on PERs in the mid teens, yet it has good prospects. It may not have as fast a growth rate as many of the tech companies, but relative to its price it is very attractive."
Michael Wood-Martin, Japan fund manager at Henderson Investors, says until recently, the larger traditional retailers had been under pressure while smaller niche retailers have benefited through hit products.
Wood-Martin adds: "Last year the old-type retailers were under pressure due to a lack of consumer confidence and deflation, while the younger companies were performing much better."
Now, with an improvement in consumer sentiment, traditional companies are coming back into favour. According to Wood-Martin, this is because the old style companies operate on much slimmer margins and are therefore more leveraged to a pick up in the economy.
Also, because of the polarisation in values between traditional and new arrivals, the highly rated new players have become expensive while prices of the incumbents have fallen.
Wood-Martin will continue to hold Fast Retailing. More traditional retailers he likes are Shimachu and Uny, where profits are likely to rise as consumer sentiment recovers.