US fund managers are underweighting the retail sector on the back of concerns over the domestic econ...
US fund managers are underweighting the retail sector on the back of concerns over the domestic economy.
Perpetual and Martin Currie are both underweight the sector in the belief it is being hit by the slowdown in US growth. The retail sector has also been underperforming the main market with the S&P Retail Stores' Specialist sector seeing a fall of 10.75% in dollar terms in the 12 months to 23 June compared with a rise of 8.27% in the S&P 500 over the same time period.
Phil Chappell, US fund manager at Perpetual, says: "The sector has been very weak this year. Sales have started to slow on the back of high interest rates, so the sector has underperformed. We have had several profit warnings and apart from companies like Wal-Mart and Best Buy, profit growth has slowed. We have been underweight the sector but I would look to get back in if it became clear the Federal Reserve was coming to the end of its monetary tightening. Traditionally these stocks are good performers October/November in the run-up to Christmas and we would look to up our weighting then."
Chappell favours Target which he says is an up-market Wal-Mart, with the company planning to roll out more stores in the US. The group is also looking to set up superstores selling clothes, hardware and food. Target is on a P/E of 20.4 times and the company has seen its share price fall by 15.86% in dollar terms in the 12 months to 23 June.
Grant Wilson, US fund manager at Martin Currie, says: "In sentiment terms things are not terribly positive for the retail sector. Slowing growth is not good for the consumer cyclicals. At the same time retailers lack pricing power. This is written all over their profit and loss accounts and every time you go into a store it seems the goods are cheaper and there are more of them. We have less than the market weighting in the consumer cyclicals area and particularly in retailing."
Wilson does hold Wal-Mart, which he considers to be among the best companies for discount retailing. He says through efficient distribution the firm is able to get better returns from each square foot of floorspace in its stores than most of its rivals. Wal-Mart is on a P/E of 40.41 times and has seen its share price rise by 23.74% in the 12 months to 23 June.
Chappell is keen on exposure to electronics retailers in a bid to benefit from demand for technological goods. He favours Best Buy, which is on a P/E of 36.12 times and has seen its share price rise by 0.2% in dollar terms in the 12 months to 23 June. Chappell also likes RadioShack, which is on a P/E of 29.77 times and has seen its share price increase by 2.34% in dollar terms in the 12 months to 23 June.
Wilson holds Target and is keen on drug stores in the US, which sell a combination of pharmaceuticals products, confectionery and toiletries. He holds CVS and believes these types of companies are set to benefit from the ageing of the US population and the increase in the demand for pharmaceuticals products that this is likely to entail. CVS has around 4,100 stores around the US and is on a P/E of 22.16 times.
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