Asian stocks gain on first day of new trading month Australian retail sales jump

Asian equities made advances during the first day of the new trading month on the back of strong technology stocks. Improved manufacturing data from China and the US also helped propped regional markets.

In Australia, retail sales surprised the market by increasing 0.5% in July over the same month last year, seasonally adjusted. The market was looking for rise of around 0.3% after falls in May and June.

The magnitude of surprise is not that significant but it does break a constant stream of bad news around Australian consumption over the past few months. Consumers are buying the basics – food, household goods, restaurants and cafes all up 0.2% while department stores and personal accessory retailing continues to decline.

We think the market will now see this as a potential tipping point and with employment still strong the prospects of a retail recovery into Christmas is looking more likely.
Retail names like David Jones, Myer and cash backed Premier Investments should see an improvement in their depressed shareprices, having been completely discarded by the market over the past few months. These businesses do face structural vulnerabilities but their ability to generate earnings in the near term should not be under estimated. Consensus estimates have these three retailers alone generating around $6bn collectively in 2012.

Value is now starting to emerge and small cap industrial companies, leveraged to domestic consumption, should outperform the market over the next few months.

The Reserve Bank of Australia (RBA) will have its hands busy with this data. If employment holds up, the case for a rate decline as implied by the bond market becomes a lot less likely. Hence the rise in the A$ against the US$ following the news, now with its sights at around $1.08-1.09 where it could face traffic.