Interest rates went up, so did retail stocks. What's going on?
The RBA hiked interest rates on Melbourne Cup Day - that sounds bad for consumers but beaten down retail stocks caught a hot bid.
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Yesterday, as Spring Carnival festivities were in full swing and all eyes were on The Race that Stops the Nation, something strange, quirky or counterintuitive happened in markets. Just like horses out of the gates at Flemington, ASX-listed retailers caught a bid and ran hard into the close.
A quick look at the field reveals a few roughies put in surprise performances: Myer (+7.5%), Cettire (+7.4%), Temple & Webster (+7.0%), and Kogan (+6.0%) led the pack.
The Consumer Discretionary sector has endured a tough period, with the S&P/ASX 200 Consumer Discretionary Index down 9.48% over the past 12 months, a figure that masks the damage below the surface, particularly at the small end of the market.
So, what was the catalyst for the turnaround? Well, that’s the quirk. As expected, at 2:30pm the RBA delivered its fifth consecutive rate hike, taking the cash rate to 4.85%. It was another hit for households already feeling the pinch of higher interest rates and persistent inflation, which the RBA says remains a key concern.
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Despite the hawkish commentary in the RBA’s Monetary Policy Decision, one particular line caught the market's attention, hinting that we might finally be approaching the end of the rate-hiking cycle:
“Today’s policy decision was by majority: six members voted to increase the cash rate target by 25 basis points to 4.85 per cent; three members voted to leave the cash rate target unchanged at 4.60 per cent.”
It seems market participants have taken the split decision as the signal that we're at the top, which sent a key interest rate expectations indicator sharply lower.
Chris Stott, Portfolio Manager at 1851 Capital, told Patrick Poke on The Rules of Investing podcast that he is closely tracking 3-year Australian Government Bond yields as a proxy for the path of interest rates.
“We watch the 3-year bond really closely because we think it has a strong correlation with the small industrial market. If we start to see yields tick down there, it will give us greater confidence in the rate outlook.”
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Aren’t higher rates going to hurt the consumer?
There’s no guarantee the RBA is done hiking interest rates, and the environment for retailers undoubtedly just got harder. While the rally in retail stocks seems at odds with the current economic reality, Stott notes that the stock market typically moves six to nine months ahead of the economy.
“We’re starting to see some significant value out there in the market, and we’re doing the work to see where we want to be positioned over the next 3 - 6 months.”
Two names on Stott’s watchlist are Baby Bunting (ASX: BBN) and Autosports Group (ASX: ASG), down 54% and 73% respectively over the past 12 months.
Similarly, in a recent interview, Seneca’s Luke Laretive highlighted retailers Lovisa (ASX:LOV) and Universal Store (ASX:UNI) as attractive value opportunities.
Only time will tell whether this move marks a true floor for a beaten-down sector or merely a dead-cat bounce. Ambiguity remains regarding the market's interpretation of the RBA’s statement, and the futures market isn’t pricing in a full 25-basis-point rate cut until 2028.
Timing the rebound in retail isn’t for the faint-hearted - and is perhaps a sport best left to professional jockeys. One thing that is clear is that by the time there is certainty on rate cuts, many retail stocks will have already bolted.
What's your take? Do you think we've hit peak interest rates and are you smart/brave/foolish enough to back any retailers?
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Livewire is Australia’s #1 website for expert investment analysis. We work with leading investment professionals to deliver curated content that helps investors make confident and informed decisions. Safe investing and thanks for reading...
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Livewire is Australia’s #1 website for expert investment analysis. We work with leading investment professionals to deliver curated content that helps investors make confident and informed decisions. Safe investing and thanks for reading...
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