How to sell
The local General Retail Index has returned about 770%, or 24% per annum over the last decade. To be clear, this includes the likes of Woolies, Massmart and Mr Price, but excludes the more defensive food retailers like Shoprite and Spar. Since the great recession of 2009, local GDP growth has been reliant on quarter-after-quarter of consumer expenditure growth while growth in other sectors of the economy has been erratic. Yes, a decent dose of wage inflation has helped, as did a lower base for employment after the local economy shed about a million jobs in that recession. But is that really sustainable in an economy where productivity growth, employment growth and capital formation are at a 25-year low?
The problem is that our retail sector is to a large degree being priced as if it the music is set to continue. To put things into perspective, since the lows of 2009, the retail index has increased by 265% of which 115% of that was as a result of [earnings] multiple expansion. The p/e for the sector now sits at 19.4, a full two standard deviations from its mean. To humour the statisticians, going by data over the full decade, there is less than a 2.28% chance of a further multiple expansion. Or in layman’s terms, theses shares are as expensive as we have ever known them to be.
Of course one could argue that higher multiples are justified due to a record low interest rate environment. I would be happy to agree, but only if you can guarantee a repeat of a few events that have shaped the earnings performance of this sector over the last decade. We have had interest rates decline from above 20% a decade ago to 8.5% today boosting discretionary spending along with the ratings of these shares. This is obviously not repeatable, as is the credit surge of the individual. In 2002 personal debt-to-GDP was 35%, in 2012 that f igure stands at 76%. Will we continue to 160% debt-to-GDP over the next decade?
The biggest resource boom in over a century has also benefited discretionary spending significantly, perhaps blinding us to our own structural problems. The resource boom may have lost its sparkle and as a country we are now left to look inwardly as our windfalls dissipate. Perhaps the biggest windfall is still playing itself out via the bond market. R80bn has f lown in this year as the rest of the world is failing a major due diligence test in the blind search for yield. This has for the moment covered the R70bn gaping trade deficit handsomely. Don’t forget Western capital’s love affair with the very retailers. The proverbial trade winds won’t blow forever. Perhaps it’s time to sell the good news and look across the ocean, or only north of the border, for new trade or rather investment destinations.