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It’s early December, and already we are seeing the sign of the pre-Christmas spending drive from retailers, perhaps now more than ever. Retailers are visibly worried about the 2010 shopping season which traditionally provides up to one-third of yearly revenue for retailers across Australia.
A tell-tale sign is the ever increasing push toward Christmas advertising and early bird sales. Retailers are desperate to see consumers pull out their wallets and start spending for the holiday season. Direct mail, television, online advertising, -Christmas is everywhere. There is no doubt your mail box, similar to mine is being inundated with Christmas collateral daily, all before you even have the chance to drink your morning coffee!
What does this mean for traders? It is very clear we may not see the traditional high spend from consumers across Australia. This will have a direct impact on the earnings of major retailers and in turn, the consumer discretionary sector as a whole.
The technicals present a very similar picture of the sector and major retailers. Charts are struggling to find direction and Elliott gives us very little in the way of buying signals. Some $40 billion of sales are currently factored in for the Christmas season, yet evidently, this remains an extremely bullish and perhaps optimistic Christmas wish...
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Whilst an indication of the past may not always be the best representation of the future, growth rates present a very interesting picture and GDP results for November were far from inspiring. Coming in much softer than expected, the effects of withdrawn fiscal stimulus and a series of interest rate rises have an obvious impact on consumer spending and inflation.
The point to note: The purse strings are tightening. Costs remain high. Electricity bills, mortgages and rising food costs all continue to weigh on Australian households. Christmas stockings may not quite be as plump this year and the retail sector will be the first to suffer this major blow in consumer spending.
Many sectors continue to outperform, particularly those leveraged to commodities growth (as has been the subject of this column for several months!) There are many areas one can put one's money leading into the Christmas period, yet the Australian retail sector is certainly not one of them. Top-down analysis is vital and will point to those sectors and stocks which are well supported from a technical base, complimented by a strong fundamental investment picture. These are the stocks you can expect to perform well into 2011.
Stay ahead of the game,
Lachlan McPherson
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