Consumer cyclicals continue to come under pressure in the US, due to anticipated interest rate rises...
Consumer cyclicals continue to come under pressure in the US, due to anticipated interest rate rises and slowdown in high street spending.
These issues have been exacerbated by a recent downgrade of the retail sector by Goldman Sachs, which lowered its recommendations on some of the US bigger retail names, including Wal-Mart, Target, Kohls and Costco.
In the year to 9 May, the retail sector has underperformed the broader US market by 15%.
Alison Wright, US fund manager at Britannic Asset Management, says the key concern is that the environment for retail stocks can only deteriorate in the near term. Although there has been little evidence so far of a significant slowing in consumer spending, the concern is that this is going to take place.
Additionally, there are a number of near-term seasonal factors that have been affecting specific areas of retail, she says.
Wright adds: "The second quarter of the year is traditionally weak on a seasonal basis particularly for the apparel and mall-based retailers which tend to be more impacted by the weather.
"Over the past two years many retailers have been very successful in cutting costs to improve margins, and many now have little room for further improvement on this front, especially given the uptick this year in capital spending levels and the increasing pressure on wages. Despite all of these pressures, we expect the bigger discount retailers like Wal-Mart, Costco and Target will perform well and the results of these companies to be in line or ahead of expectations."
Her confidence in these companies is due to their selling of more standard, rather than luxury items.
Wright is positive on the sector longer term, but says the stocks are unlikely to bounceback until there is more visibility on interest rate peaking and the extent of slowing of the consumer. For this reason Britannic will look to become more positive in retailers later in the year, but will be more valuation sensitive on stock selection.
Scottish Equitable Asset Management (SEAM), is also marginally underweight retailers. Andrew Dove fund manager at SEAM, says rising interest rates, higher oil prices and uncertainly over the share market mean people will have less disposable income and will therefore become increasingly cautious in their spending. Within consumer cyclicals, this is impacting particularly on the retail and automobile subsectors, he says.
Dove says: "Companies like Wal-Mart are unlikely to be too severely impacted upon, because they provide a lot of basic items, which are part of everyday spending."
Within the retail sector Scottish Equitable holds Wal-Mart, Costco, Gap and Home Depot. Although negative on the sector, the fund does not take major bets and therefore holds some of the more defensive companies.
The auto sector is also coming under pressure, according to Dove, as car sales will subside with lower disposable income and higher oil prices.
Dove says: "The adverse retail environment means people are being more conservative, which will mean people delaying their purchases of new cars or buying cheaper cars."