Retail stocks keep plunging after rate hike

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Johannesburg - South African consumers, already boxed into a corner by a weakened rand, higher interest rates, increasing inflation and higher petrol prices, were undermined further by a surprise tailspin in retail stocks yesterday.

Retail stocks were set adrift by the impact of the Reserve Bank’s 50 basis point increase in the repo rate last week, and as well as delayed shocks of earlier sell-offs, as low consumer confidence translated into lower sales.

But more importantly, analysts said yesterday, retail stocks were caught in a tailspin by global sentiment rather than company-specific factors.

In yesterday’s rout in the sector, clothing and homeware chain Mr Price fell 2.7 percent, while fashion retailers Truworths and Foschini declined by 1.96 percent and 1.09 percent, respectively. Among furniture retailers, JD Group declined by 2.97 percent and Lewis Group, which has just released a not so impressive trading update, shed 1.11 percent.

“The surprise interest rate hike which followed shortly after [weak sales updates] has kept this and other interest-rate sensitive sectors such as banks under pressure. What makes matters worse for the retailers is that the weak rand may put pressure on profit margins as retailers will struggle to push through cost increases onto an already fragile consumer base,” Argon Asset Management retail analyst Funeka Beja said.

She said the retail shares had been sold off since the second week of January after many of them reported disappointing trading updates for the December trading period.

Abri du Plessis, the chief investment officer at Gryphon Asset Management, said yesterday’s decline on the JSE had little to do with companies’ specifics but rather with sentiments internationally.

“We have seen the global market coming down quite hard, especially in the US, which pulled down the Asian markets as well.”

Chris Gilmour, a retail analyst at Absa, said the markets had reacted to a number of issues including a directive action on the increase of interest rate. He believed this was just the start of an increasing rate cycle but opinions varied on how far the increase would go.

Second, he said most of the affected stocks had significant foreign shareholdings and it could be that foreigners were reacting to the effect of interest rates hikes which could put pressure on company earnings.

Beja said she believed that the retailers with a higher interest rate exposure, such as the furniture retailers, Foschini and Truworths, were likely to be sold off harder than the more defensive players such as the food retailers. - Business Report

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