Nasty cocktail knocks retail shares

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Johannesburg - Retail shares came tumbling down yesterday, with analysts saying the increase in interest rates would further constrict consumer spending.

At the same time, retailers would probably suffer from the weakening of the rand.

Woolworths slipped 4.46 percent to close at R63.25 and Shoprite dropped 2.67 percent to R145.50, while Foschini shed 2.07 percent to R94.50 and Truworths gave up 1.86 percent to R74.

Jean Pierre Verster, an analyst from 36One Asset Management, said retail stocks had reacted negatively to the hike in the repo rate.

He said both retailers and consumers would suffer. “It is the worst of both worlds… all debt linked to the repo rate will be more expensive.”

In addition, Verster said the rand had weakened on the announcement. He thought this was on “disappointment that South Africa did not go as far as Turkey – in terms of the central bank raising the rate significantly”.

This meant imported goods would become more expensive as selling prices were raised to offset the weakening rand. At the same time, consumers would have less disposable income because the cost of servicing debt would increase.

“So it is the worst of both worlds for retailers, seeing that their costs will go up but their selling volumes could go down,” Verster said.

Ron Klipin, a retail analyst at Cratos Wealth, agreed that retail stocks did not take the interest rate news very well. He said that from a global point of view, South Africa was experiencing a general sell-off of its bonds and equities.

“This is part of a general exodus from emerging markets, with a flow of funds going back into developed markets,” Klipin said. – Business Report



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