Europe concerns back on investors’ minds

<p>Asian stocks traded mostly lower today as concerns about Europe dominated investors’ minds. The Japanese Nikkei was trading about 1.1 per cent lower while the […]</p>

Asian stocks traded mostly lower today as concerns about Europe dominated investors’ minds.

The Japanese Nikkei was trading about 1.1 per cent lower while the Hang Seng was also weaker. Only the Shanghai Index was showing some gains in mid afternoon trade.

In Australia, the latest retail data did not come as a complete surprise. The unchanged number in November is only a disappointment when taken relative to market expectations of a 0.4% rise.

Why analysts had expected a rise, when all the anecdotal evidence had suggested a tight environment, is another issue. The anecdotes were so strong that the RBA was even prompted in changing its course and cuttings rates.

That doesn’t mean the November number is bad at all. Instead, we think the most important measure is profitability, not necessarily sales.

A perfect example is companies who during the financial year ending June 2011 managed to grow sales but saw a large decline in their earnings base. True, sales numbers were up but profits are more important and they were under pressure in 2011.

The reason we think cyclical retail stocks have fallen so much over the past few months is that consensus market expectations are finally coming back to more realistic levels.

And not all retailers are doing it tough on the sales front either. Super Retail group is a perfect example. The auto division booked a 3.5 per cent increase in comparable sales, leisure a 9.9% increase and the newly acquired sports division a 7.8% comparable boost.

Based on their price performance and having been oversold the past few months, we think these stocks could outperform – Centro Retail Australia, Harvey Norman, Myer and Ten Holdings.

The first two are backed but a solid retail portfolio. Myer seems to be getting its merchandising right and will no doubt find value hunters when it reports its profit. Ten is perhaps more of a longer term play, undergoing a lengthy cultural change, with upside through an attractive outdoor advertising business in Eye Corp.

 

 

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.