Investment: Pain turns to gain for hard-hit high street

THE RETAIL SECTOR has been a grim place for investors this year, with share prices scarred by profits warnings and downgrades as higher interest rates and the consumer slowdown have taken their toll.

But after such a steep decline - the general retail sector has underperformed the FT All Share by 16 per cent so far this year - are we now at or near the bottom? Could it be time to selectively start buying back in?

Valuations certainly look tempting. The sharp fall since the start of the year has taken the overall under-performance of the sector to 30 per cent since its peak in July 1996.

According to a recent research note on the sector by Credit Suisse First Boston relative valuations are now comparable with those last seen in the last recession. The sector average p/e is 16 while the gross yield is 3.4 per cent.

There are a number of reasons for this, of course. After the false dawn of 1997, when sales were inflated by building society windfalls, this year has provided a rude awakening.

Higher interest rates have been a key factor in dampening demand, but profitability has been squeezed further by costs rising faster than inflation.

Return on capital has come under pressure as retailers have found demand slowing just as many have started to increase capacity

The question now is whether the de-rating has gone too far. Consumers are in better shape than they were at the start of the last recession as individuals have been borrowing less and saving more.

The savings ratio currently stands at just under 10 per cent, for example, compared to just over 6 per cent at the start of the last slump. This should limit the downside.

Interest rates may now be at their peak and many commentators expect the next move might be down, thereby reducing the pressure, on consumer spending. Retailers also tend to be an early cycle mover, so while their ratings have been among the first to suffer, they could also recover fastest.

According to Credit Suisse First Boston's note entitled "Pain turns to Gain", it will be the FTSE 100 retailers - Marks & Spencer, GUS, Boots and Kingfisher - that will feel the benefit soonest.

However, for sentiment to change the market will need to reassured about M&S, which still accounts for a quarter or the whole sector. It has been hit by a series of downgrades and until that stops, little will happen.

Other companies that look under-valued are Dixons, where the digital boost does not appear to have been fully factored in, and Next (now yielding 5 per cent) whose profits warning was due to too much demand rather than too little. Smaller fashion stock like New Look and Monsoon have seen vales fall sharply, but the uplifting breeze could take a while to reach these second liners.

The jury is still very much out on retailers of higher ticket items where valuations have been savaged in recent months. Companies like MFI and Carpetright now yield more than 10 per cent. That cannot carry on but sentiment is weakest here.

There is no reason to hurry, either. An interest rate turn on its own might not be enough to trigger a change in sentiment as the market will start to become obsessed by Christmas trading before too long.

So there is no harm in investors sitting on their hands for a few months, but bolder souls might like to start picking out a few favourites.

Start your day with The Independent, sign up for daily news emails
Life and Style
love + sex
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
News
people
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Reach Volunteering: External Finance Trustee Needed!

Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

Christine McCleave: FP&A Analyst

£36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

Recruitment Genius: Sales Executive - OTE £40,000

£15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

Day In a Page

Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

Climate change key in Syrian conflict

And it will trigger more war in future
How I outwitted the Gestapo

How I outwitted the Gestapo

My life as a Jew in wartime Berlin
The nation's favourite animal revealed

The nation's favourite animal revealed

Women like cuddly creatures whilst men like creepy-crawlies
Is this the way to get young people to vote?

Getting young people to vote

From #VOTESELFISH to Bite the Ballot
Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

Poldark star Heida Reed

'I don't think a single bodice gets ripped'
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn