High unemployment and low sales are depressing the performance of retailers across Europe, leading s...
High unemployment and low sales are depressing the performance of retailers across Europe, leading some managers to hold a zero weighting in the sector.
Raj Shant, head of European equities at Newton, is one manager currently without exposure to general retailers in his Newton Continental European fund.
Shant maintains that European consumer spending continues to be sluggish, a trend that has held sway since the start of the year.
In the near term, European retailers face a range of problems, he says, with the most important being the weakness in consumer end demand, which has fed through into low sales volumes. One reason for this, Shant argues, is that consumers in the eurozone have still not come to terms with the introduction of the euro and many fear price increases may have been slipped in during the changeover to the euro through retailers rounding prices up.
The low sales volumes have led to a squeeze in profit margins, which are also being eroded by wage rises within the eurozone. Although this means European consumers have more available income it also means that the retailers' labour costs are rising.
And while consumers are distrustful of price hikes, retailers do not have the option of raising prices to cover their increased labour costs, Shant says. This means continental retailers will suffer in the short term while sales volumes are low.
'I see no compelling reason to invest in European retailers at present,' he says. However, in the long term, Shant believes the strength of the euro gives cause for optimism.
'If the euro strengthens, it greatly reduces the prices of imports, which, in turn, means less inflation and therefore less pressure on the European Central Bank to raise interest rates.'
Another effect of a strong euro could be increased consumer confidence, he adds. Shant says this would be especially true of German consumers long used to having a strong Deutschmark. A strong euro would buoy up German consumer confidence.
Jeremy Knight, fund manager at Legg Mason, does not go along with the theory that consumers are wary of price raises following the changeover to the euro. While this may explain low spending in part, he says, consumer caution is better explained by a widespread fear of unemployment and the poor performance of stock markets.
He is overweight on the general retail sector largely due to his holding in one stock, Marionnaud, a French perfume retailer. This company is experiencing 10% annual growth against a market average of around 4%, Knight says.
The French market in general is a good macro call, he says, as the current French government has pledged to cut taxes 5% this year and to cut taxes by 30% over the lifetime of the government.
Accordingly, the other stock Legg Mason is actively considering is also French ' Galeries Lafayette, a department and supermarket chain. At current valuations, the stock looks cheap.
In Germany, he acknowledges that sales volumes are down and that unions have been pushing for wage increases to catch up with inflation. This may be a positive for the investment outlook, he adds. Inflation is coming down in Germany and, if wages rise, consumers have more money in their pockets to spend.
Global growth returning.
Opportunities in Germany.
Consumer spending is depressed.
Wages in retail sector are risings.
Euro fear inhibiting sales.