Today, shares of ASX-listed retail stocks were trending lower following a poor consumer sentiment figure published earlier in the day.
The latest Westpac Melbourne Institute of Consumer Sentiment index showed a sharp drop of 3.2% in April, month-over-month, to 96.2 points.
Westpac Banking Corp (ASX: WBC) Chief Economist, Bill Evans, said the result was "disappointing" ahead of the government's budget which will be released next month.
In 2014, the index plummeted 6.8% to 92.9 points in the aftermath of the federal budget and led to poor spending figures in the second half of 2014.
"We would have preferred to have seen some upward momentum in the index going into the important Commonwealth Budget that will be released next month," Mr Evans noted.
He said consumers may be worried about the ripple effects of a falling iron ore price – our country's most lucrative export – and the lack of a rate cut in April, given the market had factored-in a probability of around 75% that the RBA would cut the official rate to just 2%.
"Delaying the decision until May is consistent with a cautious approach near the end of a long easing cycle," Mr Evans said. "The unexpected 21% fall in the iron ore price with its associated implications for the terms of trade and nominal income growth strengthens the case for more rate relief."
He said today's reading on consumer sentiment supports expectations for a rate cut sooner rather than later and even went so far as to say his bank is "extremely confident that the Bank will finally deliver the much anticipated second cut of 25bps on May 5."
Retailers, watch out below…
Falling interest rates are a sign of a weakening economy, not one experiencing desirable levels of growth.
For Australian stocks however, it can provide the impetus for further gains by making them relatively more attractive investments compared to other asset classes like bonds, term deposits and savings accounts.
Paradoxically, the risk-reward trade-off for retail stocks may actually worsen as a result of the underlying catalysts driving lower rates. What I mean is, lower rates are a sign of a weaker economy which will, as noted above, effect confidence and then spending.
Personally, I think the recent lacklustre results from Kathmandu Holdings Ltd (ASX: KMD) and Myer Holdings Ltd (ASX: MYR) will be echoed by fellow retailers like JB Hi-Fi Limited (ASX: JBH), Harvey Norman Holdings Ltd (ASX: HVN) and Dick Smith Holdings Ltd (ASX: DSH) over the medium term.
Right now, some retailers are being buoyed by a strong housing market but that won't go on forever.
As an aside, on 1 April 2015, Myer was the most heavily shorted stock on the ASX. Investors who 'short' stocks are betting they'll fall in price.
Two retailers to consider
Instead of focusing on the above five retail stocks investors could turn their attention to other retailers which have proven themselves to be less fickle and reliable in terms of earnings growth and dividend payouts.
For example, Premier Investments Limited (ASX: PMV) – the owner of Smiggle, Just Jeans, Peter Alexander and more – and Burson Group Ltd (ASX: BAP), have a proven ability to grow earnings and currently pay reliable dividends.
