Why are these ASX 200 retail shares lagging the market today?

Let’s find out.

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Key points

  • ASX 200 retail shares are among the most exposed to rising interest rates and inflation 
  • The gloomy outlook for consumer spending prompts Macquarie to downgrade its forecasts for the sector 
  • The broker is urging investors to sell discretionary names and buy the more defensive consumer staples shares 

Investors have lost over $100 billion in today’s market bloodbath and some ASX 200 retail shares could be worse for wear due to their direct exposure to waning consumer confidence.

The S&P/ASX 200 Index (ASX: XJO) slumped over 4% during lunchtime trade with every sector in the red.

Outlook for ASX 200 retail shares darken

Markets are spooked by a potential hard landing by the US economy. The bears are emboldened by speculation that the US Federal Reserve will make an oversized 0.75% interest rate hike at its next meet.

The aggressive rate hikes could send the world’s biggest economy into a recession. What’s more, the move will pressure our central bank to take more dramatic rate increases too.

Higher interest will add to households’ cost of living pain with the price of everything going up. This leaves consumer discretionary retailers to face the brunt of the market meltdown.

Downgrades leaves no bargain buys

To get a sense of how bad things could get for ASX 200 retail shares, Macquarie looked at what happened during the GFC as the broker downgraded its forecasts for the sector.

Macquarie said:

Our forecasts now reflect the experience of slowing revenue and EBIT margin pressure, as we experienced in 2009.

The economy is in a different position, with low unemployment, low interest rates and high cash balances and this may make the recession behave differently. But as a baseline, rising inflation and plummeting consumer confidence are likely to drag on discretionary retailers.

Hit by downgrades

The silver lining is that the broker thinks Australia will escape a recession, unlike the US. While our economy might not contract for two consecutive quarters (the official definition of a recession), Macquarie reckons inflation here will hit 7%.

Against this backdrop, the broker is urging investors to dump ASX 200 retail shares in the discretionary space for consumer staples shares.

Which ASX 200 retail shares to buy and sell

The broker downgraded the Wesfarmers Ltd (ASX: WES) share price and JB Hi-Fi Limited (ASX: JBH) share price to underperform.

It also cut its rating on the Harvey Norman Holdings Limited (ASX: HVN) share price to neutral. What saved Harvey Norman from a bigger downgrade was its lower relative valuation and more reasonable consensus estimates.

On the flipside, Macquarie is urging investors to buy into the more defensive ASX supermarket shares. These include the Coles Group Ltd (ASX: COL) share price and Metcash Limited (ASX: MTS) share price.

Motley Fool contributor Brendon Lau has positions in Macquarie Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Harvey Norman Holdings Ltd. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET, Harvey Norman Holdings Ltd., and Wesfarmers Limited. The Motley Fool Australia has recommended Macquarie Group Limited. 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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