Shirley Kemp
Traditionally the retail sector has reacted strongly to changes in the interest rate. Driven by a combination of factors, in the past when interest rates went up, retail shares fell and when interest rates came down, retail came back into favour.
The declines in the prime interest rate after its high of 25,5% in 1998 were met with a year-long upswing in the retail sector. But while rates remained low, something went wrong and the often cited “difficult trading conditions” were increasingly evident, with profit warnings becoming commonplace through 2000 and into 2001.
The dip in the sector since the beginning of last year has seen no attempt at a recovery until the latest rate cut was announced two weeks ago. Perhaps the rise in the retail index since then is simply a knee-jerk reaction, but if we take a longer-term look at the sector, surely the turn is long overdue with many of the stocks now offering good value.
The table below shows that the worst performers in the sector so far this year have been the companies bringing out the most recent profit warnings, such as Heritage and Busby. Pick ‘n Pay and Shoprite have also been hard hit, though, despite showing continued earnings growth. The table also shows that many of the retail companies have shown an improved performance in June compared to their performance over the first six months of the year.
Investors may already have realised that now might be the right time to start buying back into the sector, particularly those who believe that profit warnings are tapering to an end, inflation is under control and that from this low base up is the only way forward. Nonetheless the recovery (if there is one) will likely be slow to materialise.