Resources to the fore as retailers flounder
Two sectors tend to move in opposite directions and investors are likely to follow
INVESTORS exiting retail stocks to seek other avenues for growth may look to the resources sector as its prospects seem to be on the up.
This year, the JSE General Retailers index dropped 20.82% as the consumer environment was marred by slow spending, high food inflation and declining credit sales.
In the same period, resources saw a resurgence, lifting the Resources 10 index 33.5%.
A similar trend was evident in 2015, when the General Retailers index gained 8.84% while the Resources index was down about 19.5%.
Kaeleen Brown, a retail analyst at SBG Securities, said this week that, historically, these stocks tended to move in opposite directions, “so when one has done well, the other hasn’t”.
Also, Brown said, the retail sector was driven by interest rates, consumer confidence and growth, whereas resource stocks were driven by different factors: “It’s more about the commodity cycle.”
In the second half of last year, resources were underperforming after a drastic slowdown in demand by China. This forced most mining companies to cut costs and restructure their businesses to keep afloat.
Companies such as the diversimilar sified Anglo American were under pressure to sell some assets to avoid taking on more debt. Most commodity prices hit record lows in January this year with, for example, platinum trading at $818/oz and gold at $1 074/oz.
But as fortunes changed, retailers found themselves in a position to that which mining companies had been in.
In the past year, the share prices of Mr Price and Woolworths have dropped by 25.95% and 35.48% respectively, with headwinds expected to carry through into the first quarter of 2017.
Brown said investors in retail stocks were likely to move their investments from grocery retailers to clothing retailers “with the expectation that they will do better into the second half of next year because a lot of the headwinds will abate”.
Makwe Masilela, a portfolio manager at BP Bernstein, said retailers and resources had different drivers and South African retailers this year were grappling with low consumer confidence, rising food prices and the National Credit Regulator, which had been stricter with lending since last year.
“There has been a knock-on [effect on] our retailers. Food prices have been going up but some retailers have been able to fill the gap. With miners, to start picking up there needs to be demand,” Masilela said.
Keith McLachlan, a fund manager at AlphaWealth, said a sector rotation from retail into resources might be an “oversimplification” of the movement of stocks. “There is finite capital in the market and it does seek out both value and growth opportunities and it takes a while for that capital to rotate out of one sector into another sector, but it doesn’t necessarily flow in such a linear manner.
“The resources run has been unrelated to the decline in retailers as they have vastly different dynamics driving those markets and I don’t think you can draw a straight line between the two,” he said.
The slow growth story of retailers might just be the beginning of a downturn, said Brown, as “you are still going to have some terrible numbers coming out of the clothing retailers over the next couple of months”.
Going to have some terrible numbers out of clothing retailers