It would appear our appetite for new iPhone’s and BBQs drove a lift in September retail sales. Most key discretionary categories strengthened month on month. Electrical and electronic goods were up 9.2% reflecting new product releases, recreational goods up 6% and footwear/other personal accessory up 2.3%.

If you look at the PCP (previous corresponding period) data below you can see where you do and don’t want to be in discretionary retail. Department stores are going the way of the dinosaur, clothing is incredibly tough, yet liquor is good, supermarkets good, recreational goods recovering and the big PCP growth has been in anything household improvement/upgrade as house prices drive a renovation/upgrade cycle. Total housegoods growth is up 9.8% versus the previous corresponding period.

The other interesting one is the PCP growth in cafes, restaurants and takeaway food services of 11.6%. That may somewhat explain Domino’s (DMP) fast domestic sales growth.

With the key Xmas retail sales period upon us, petrol prices falling, house prices rising and interest rates staying low, the macro settings are in place for a decent domestic fourth quarter in discretionary retailing. I think there’s a bounce trade if nothing else in names like JB Hi-Fi (JBH), Super Retail Group (SUL) and RCG Corporation (RCG) from current levels. Fundamentally I like the global landlord Westfield Corporation (WFD).

Retail Sales (September 2014)

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Source: Australian Bureau of Statistics

Europe: avoid

Now let’s swing over to Europe where the European Commission cut its growth forecast for the Eurozone from +1.2% to +0.8%. Weakness in Germany and France led the downgrades. As usual, the deep government bond markets and the Euro itself were effective in transmitting the weak EU growth story. European government bonds have been rallying hard, led by German bonds on anticipation of weak growth and low inflation. The EUR/USD cross has been falling in expectation of an ECB QE response to lower than expected growth and inflation.

I remain an outright bear on the Eurozone and the Euro itself. There are rumours that ECB Chief Draghi is losing support and I can’t see an easy fix for Europe. 18 governments, 18 separate bond markets, one currency, one central bank. That doesn’t work and I think you are much better off being invested in countries with one government, one bond market, one central bank and one currency (UK, US, Japan, Canada, China, New Zealand, Australia etc.).

There is a reason the German 10yr bonds yield is just 0.81% and the entire German bond yield curve from 4yrs down has a negative yield. Yes, negative. It’s telling you there is no quick fix here and for Australian investors this is an important point.

The Australian Dollar is up 6% versus the Euro this year to date, which is translating to significant losses year to date in Australian Dollar terms for Australian’s invested in Eurozone equities. The Euro Stoxx is down 9.02% in Aussie dollars this year, the CAC 40 minus 10.3% and the DAX minus 10.5%. The FTSE 100 is only down 5.70% in Aussie dollars due to the relative resilience of the British Pound.

You can see why I thump the table on diversification into US equities in US dollars. The year to date gain in Australian dollar terms for the Dow is 7.05%, S&P500 11.05% and NASDAQ 13.1%. I continue to strongly recommend the US dollar and US equities over the Euro and Eurozone equities.

100% of Charlie Aitken’s fees for writing for the Switzer Super Report are donated to The Sydney Children’s Hospital Foundation.

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.

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