Equity volatility over the past few weeks is being seen as a sign of a return to a broader-based, le...
Equity volatility over the past few weeks is being seen as a sign of a return to a broader-based, less-polarised, more considered market, and an end to the sharp distinction between old and new economies.
This is already happening in the retail sector, which some fund managers now see as facing a long-term decline in the wake of the announcements of a slow down in retail sales growth, a worrying rise in the consumer price index, and the promise of further interest rate rises.
During trading on 13 and 14 April, the S&P Retail Speciality Index fell by 12% in dollar terms, and the S&P Consumer Cyclicals Index was down 9%. This is a continuation of a volatile year in which the S&P 500 lost 20% of its value in January and February, then gained by 30% in the March followed by early April rotation away from TMT.
James McLellan, director of US equities at Clerical Medical Investment, says retail stocks, harmed by slowing retail sales growth and concerns over future interest rate hikes, were also affected by the volatility led by negative sentiment regarding tech shares, and by traders liquidating margin positions.
He says: "Retail got hit just as hard as technology and financials because of the indiscriminate nature of the sell-off, which has been very broad-based. Prior to that retail had enjoyed a reasonable run up, which had seen it climb up from lows at the beginning of the year. People have made their money and many have clearly decided it is time to sell."
However, despite the sector's decline he remains positive about some of the larger discount retailers like WalMart and Costco, which are able to cope with the challenge of the new economy. He says: "The interesting question is, assuming we get some sort of stability once the sell-off is finished, where does the money go next? Does it jump straight back into tech or does it adopt a broader position and become more stock specific."
Peter Goetz, portfolio specialist on the US large cap team at Dresdner RCM in America, expects many of the more robust tech, media and telecom stocks to rally, but says the news for the retail sector is not promising. He adds: "The retail sector will continue on a downward trend for a little while yet. I do not see the prospect of any big news that will bring it back."
He echoes McLellan's view that the shake-out is creating a more reflective, less polarised investor mindset.
Goetz says the distinction between old and new economy remains valid, but notes investors are beginning to see more clearly that it is many of the old economy stocks, such as WalMart and Costco, which are best positioned to take advantage of the new economy.
Andrew Dove, portfolio manager at Scottish Equitable, agrees retail is a troubled sector and sees pressures coming from high oil prices, the wealth effect of the slump in tech stock valuations, and a slow-down in house-buying, all squeezing retail spending at the margins.
He says: "It is a sector that is changing and some of the more traditional names like Sears and JC Penny are struggling to increase their sales but there is a definite switch towards discounters like WalMart and Home Depot."
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