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Why I’m avoiding most retail shares right now

The consumer discretionary sector is one of the rare bright spots on the market today as the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) tumbled 0.6% during lunch time trade.

A surprise 3.9% jump to 106.1 points in the consumer index compiled by Westpac Banking Corp (ASX: WBC) and the Melbourne Institute to a near five-year high is probably fuelling the optimism towards consumer-facing stocks like auto parts retailer Bapcor Ltd (ASX: BAP), travel agent Flight Centre Travel Group Ltd (ASX: FLT), department store Myer Holdings Ltd (ASX: MYR) and supermarket giant Woolworths Group Ltd (ASX: WOW).

We can thank increased confidence in the resource-dependent states of Western Australia and Queensland for the rise in the index as the solid rebound in commodity prices is injecting new life into these states and the mining sector.

The tax cut aimed at middle-to-lower-income households is also believed to be helping lift consumer sentiment with a reading above 100 signalling more consumers are feeling optimistic about their future than pessimistic.

But it isn’t all good news. There’s a big jump in the number of consumers believing that property prices will flatline or drop, with those living in Victoria and New South Wales having the dimmest outlook.

It’s not surprising given that these states led the national market higher, but it’s still alarming given the strong correlation between house prices and consumer spending.

What this means is that there’s probably limited scope for many of our traditional retailers to grow their top-line even as consumer sentiment jumped to a multi-year high.

Wage growth is still subdued, households are struggling with record debt, property prices look as though they have further to fall and the online disruption from overseas competitors like Amazon.com has yet to be fully felt.

From that perspective, I would be reluctant to buy the dips in Harvey Norman Holdings Limited (ASX: HVN), JB Hi-Fi Limited (ASX: JBH) and Myer, although there are some in the sector that I think are well placed to outperform in FY19.

One such consumer-exposed stock is Webjet Limited (ASX: WEB), which is struggling to keep up with its peers like Flight Centre, but has nevertheless posted a strong rebound in total transaction value (TTV) at its latest profit results.

The other is discount variety chain Reject Shop Ltd (ASX: TRS). The online shopping evolution won’t impact on its sales quite as much as other retailers given the low value nature of its goods, which often doesn’t lend itself well to the high cost of delivery.

These aren’t the only stocks with the potential to outperform the market in FY19. The experts at the Motley Fool are feeling bullish about the prospects of another niche group of stocks.

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Motley Fool contributor Brendon Lau owns shares of The Reject Shop Limited and Westpac Banking. The Motley Fool Australia owns shares of and has recommended Bapcor and Flight Centre Travel Group Limited. The Motley Fool Australia has recommended The Reject Shop Limited and Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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