Key points
- We could have seen the top end of the trading range for the ASX200 and the market may now consolidate.
- The VERY LAST place to look for guidance for overall Australian retail sales is Myer.
- Wesfarmers, owner of Coles and Bunnings, is the style of retailer you should listen to about retail sales.
It’s increasingly easy to get the feeling another bout of currency-led cross asset class volatility is about to erupt as professional investors position for year end.
The cross currents, in terms of economic data, commodity prices, currencies and relative global equity market performance, are strong, and when you have strong cross currents, you do get volatility.
My observation and gut feel suggests Wall St is running out of a little puff, Europe looks sloppy, and the VIX has bottomed. In Australia, it appears clearer that the rebound from around 5100, where I upgraded our overall domestic equity strategy back to “neutral”, has now run its course and we are re-entering a trading range.
With the major Australian banks ex-dividend and not neutralising their DRP’s on market, you will once again see the ASX200 become macro (top down) driven. At the bottom-up level the AGM season is drawing to a close and the next earnings season isn’t until February. This all goes macro again now.
Trading range
Personally, I think we’ve seen the top end of the trading range for the ASX200 and we now consolidate, with volatility, inside that trading range for the next few months. That doesn’t mean I change my overall “neutral” stance on Australian equities, it just means I encourage a little more profit taking when appropriate or rotation from outperformers to underperformers when justified (i.e. -SUN/+NAB).
I also think where the broader market has rebounded to has reduced the ability to find value, and I recommend keeping some powder dry or recycling bank dividends into some of the new IPOs coming up before year end, led by Medibank Private.
Either way, my strategy remains to increase the amount for short-term trading in portfolios to capture the maximum available capital return inside markets that will remain range-bound and volatile. I also strongly encourage you to look at all new IPOs as IPOs have been a clear source of portfolio alpha this year.
Below is the last 30 trading days in the ASX200

I am also increasing my focus on lagging stocks/sectors where I see a clear catalyst for value release.
Murphy’s Law doesn’t change anything
I have been saying over the last few weeks that the knife has stuck in the deep value floor in a horribly out of favour cyclical sector – discretionary retailers – and that I was quite bullish on Christmas.
Of course, Murphy’s Law suggests I would run into a sluggish consumer confidence reading and sloppy sales data from Myer. Let me be very clear, neither of those events change my view about the value in the right discretionary retail stocks and the catalyst for that value release of a strong Christmas trading period.
The ONLY consumer confidence reading that matters is one taken around the 15th of December. We need to remember the true driver of the “wealth effect” is residential property prices. It’s not the share market, it’s property prices.
On that basis with Sydney median property prices at record highs (median detached dwelling price $1,005,000), and variable interest rates at record lows, I think it’s fair to believe Australian households, particularly East Coast ones, are in a position to splurge a little on themselves this year. The categories I like are electronics, recreational goods and even new cars.
I also want to stress that the VERY LAST place to look for guidance for overall Australian retail sales is Myer.
Department stores are going the way of the dinosaur. Myer is a textbook example, where even heavy capex investment in the stores is seeing no sales growth. They are investing to stand still. That is a classic sign of genuine structural headwinds.
Myer reported sales growth of -1% in FY12, +1% in FY13, and 0% in FY15. After the Q1 hose-down yesterday, it’s fair to assume FY15 will be another year of 0% sales growth.
Below is a chart of Australian gross retail sales (*which are at a record high) vs. Myer’s share price (yellow line) over the last six years.

Now let’s look at Australian gross retail sales vs. Wesfarmers (WES). Wesfarmers, owner of Coles and Bunnings, is the style of retailer you should listen to about retail sales. Wesfarmers sales growth is forecast at +6% in FY15%.
Don’t listen to Myer
The point I am making today, is these Myer Q1 sales numbers did seem to trigger some knee-jerk selling in all Australian discretionary retailers yesterday. I remain of the view that is providing a buying opportunity in the right ones. I recommend accumulating JB Hi-Fi (JBH), Super Retail Group (SUL), RCG (RCG), Automotive Holdings (AHE) and Westfield Corporation as the global landlord. Myer (MYR) remains an avoid.
The other top-down reason I like the discretionary retailers is the collapsing Oil price, which is translating to falling petrol prices. The falling oil price will also play a role in keeping inflation readings low and therefore interest rates low. The falling oil price is genuinely good news for anyone who doesn’t produce it or provide services to the oil industry. It’s a tax cut for the world and it’s a good thing.
However, when I look at consensus oil price forecasts for next year ($92.00bbl) it seems the oil price forecasting community is in denial with their forecasts getting further and further away from spot ($76.87), which also means current consensus oil equity earnings are unreliably high.
You can all see the competition to have the lowest iron ore price forecast and what has happened to iron ore equities as consensus earnings have been downgraded sharply, I am warning you that is coming to oil and gas stocks early next year when the investment banks start downgrading 2015 oil price assumptions.
I am happy to stay parked in Woodside Petroleum (WPL) as the cheapest, highest fully franked yielding, best balance sheet and least “oily” Australian energy stock, but I remain of the view most people are too complacent about Santos (STO), Origin Energy (ORG) and OilSearch (OSH), which are already priced on optimistic forward multiples. They are all cum consensus downgrades and a better entry point awaits.
Broadly I think you want to be underweight oil/gas and overweight the beneficiaries of sustained lower energy prices.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances