The stockmarket, as one venerable sage once put it, acts like a voting machine in the short-term, but in the long-term it is a weighing machine. The market is sentiment driven and can over-react, but in the long term it tends to get things right and discounts the future rather efficiently.
So, what does the brutal and savage de-rating of the general retail sector, which has accelerated since last autumn tell us? It may imply that the future for retailers will be brutal and savage... The stockmarket is clearly factoring in a significant chance of a hard landing, as the global credit crunch undermines consumer spending power and consumer confidence and deflates the housing market.
How much of the consumer downturn that began last October is a long-term adjustment to excessive debt-financed spending in the past and how much is a short-term reaction to recent events is hard to say, but there is no doubt that 2008 will be a challenging year for retailers and the stockmarket is taking no prisoners. Falling sales, rising costs and weakening margins spell only one thing and that is falling profits and the stockmarket is pricing in that risk by lowering retailer's valuations across the board.
Food retailers are still seen as a different breed, but most general retailers, even those with freehold properties are now trading on price-earning ratio's of below 10 for the 2008/09 year. But what about the 'E' in the PE's? Earnings are expected to come under some pressure this year, as like for like sales flatten or dip slightly, but in a real recession sales would fall by more than that, particularly for household goods retailers. Uncertainty rules and stockmarkets hate uncertainty. Stockmarkets love interest rate cuts, but there comes a point, when consumer confidence is really low, when cutting interest rates is like pushing on a string. Retailers live in interesting (and volatile) times...
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