What do you get when you put rising inflation and interest rates together? Caution. Fear. Penny-pinching. A metaphorical slamming shut of wallets across the nation as consumer confidence falls.
This doesn't bode well for ASX retail shares, particularly those in the consumer discretionary sector.
What's happened to consumer confidence?
As my Fool colleague Mitch reported last week, the latest Westpac-Melbourne Institute consumer sentiment index fell by 4.5% from the prior quarter to 86.4.
A reading below 100 indicates we're feeling pretty worried. And the lower that number goes, the more inclined we are to not spend money on the things we want but don't actually need or can put off.
The latest reading is concerning for the economy, given it's around 10 points off how we felt at the onset of COVID-19 (75.6 points) and during the global financial crisis (79 points).
The factors feeding into this lacking confidence are skyrocketing energy prices, rising costs for various goods and services, and higher mortgage repayments as the banks increase home loan interest rates.
Bell Asset Management sums up the situation:
At present, the economy remains on a reasonably strong footing, but there is an increased risk of reduced consumer discretionary spending as priorities of the household wallet shift more toward essential purchases of fuel, utilities and food.
What does this mean for ASX retail shares?
Well, from an earnings point of view, you'd have to think falling consumer confidence wouldn't be good for the bottom line of consumer discretionary stocks, in particular.
But if we look at ASX retail shares this week, many have done well.
Let's take a quick snapshot of the week's trade in ASX retail shares following the market close on Friday.
- JB Hi-Fi Limited (ASX: JBH) up 3.65% to $39.43 this week
- Super Retail Group Ltd (ASX: SUL) up 3.73% to $8.61
- Harvey Norman Holdings Limited (ASX: HVN) up 1.34% to $3.78
- Premier Investments Limited (ASX: PMV) up 2.07% to $20.17
- City Chic Collective Ltd (ASX: CCX) up 9.43% to $1.915
Of course, we have to bear in mind that the major market sell-off this year has made many ASX 200 shares look cheap. Some investors might be buying the dip or dollar-cost averaging already, and lifting share prices as they go.
But looking ahead, one broker is decidedly bearish on ASX retail shares.
Top broker bearish on retail sector
UBS has slashed its forecasts for ASX retail shares, according to reporting in The Australian.
UBS analyst, Shaun Cousins said in a new note:
The external environment has deteriorated dramatically such that our more mixed
view of the consumer is no longer justified and a more bearish view is required.
Cousins cut his FY23 EPS estimates by an average 23% to below consensus estimates.
He downgraded Harvey Norman, City Chic Collective, and Accent Group Ltd (ASX: AX1) .
Of the ASX retail shares he covers, Cousins cut his share price targets by an average 29%.
Cousins said:
Investor appetite for consumer discretionary retail is extraordinarily low, with value
investors yet to engage with the sector given further downside risk to earnings.
UBS has also cut its share price target on Lovisa Holdings Ltd (ASX: LOV) by 20% to $16.
The broker has also reduced its price target on Premier Investments, by 26% to $23, and Super Retail by 27% to $9.50.
