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Retail to benefit from August rate cut

NAB’s (ASX: NAB) monthly business survey has encouraged the bank to lift its forecast for a rate cut in August. Its monthly report released yesterday shows that business conditions and capacity have slumped to a four-year low.

Confidence was slightly better but conditions in retail, mining and manufacturing are “very bad… despite low interest rates and falling AUD”. The survey paints a bleak picture of the Australian economy because it shows that business conditions have slumped, in June, to levels last seen in May 2009.

The bank says that “softness in China, weaker terms of trade and financial volatility, encourages us to bring our next expected rate cut forward to August”. This would seek to ease pressure in the retail and mining sectors by encouraging by both consumers and businesses to spend more.

There is no doubting it; the retail sector has been troubled in recent years by the convenience and affordability of online shopping but when an investor hears the world “lowest level since…” it gives new motivation to analysing stocks. With a falling dollar, imports will become more expensive and our retailers, who buy in bulk, should be more competitive and much more efficient since coming through such tough times.

The difference between investors and traders is both the timeframe and meticulous analysis that goes into finding “undervalued” stocks. The retail industry might be hiding a few bargains underneath its rough exterior, which is perfect for both the trader and investor. Both Harvery Norman (ASX: HVN) and Myer (ASX: MYR) have taken a beating since around May but they’re not as bad the media would have us believe.

As an investor, not only do I look for value, I also like to get paid while I wait for a stock to blossom. That is why both stocks have become even more appealing, so much so that one of them made me hit the buy button last month. At current prices, Harvey Norman offers a 3.4% fully franked yield whilst Myer boasts a 7.7% fully franked return, enough to please both value and income seeking investors.

Foolish takeaway

In the past month, Myer has climbed over 10% in value and shareholders could expect a dividend around mid-to-late September. However, don’t be surprised if the company does decide to slightly cut back the dividend or keep it at 9 cents. Harvey Norman’s diversified business model and adventure overseas will see it either flop or take off but the falling dollar will work wonders for both domestic sales and overseas earnings. Although it’s got a slightly high current P/E ratio, good results will see that reduce if it performs on its next annual report.

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Motley Fool contributor Owen Raszkiewicz owns shares in Myer.

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