Europe concerns back on investors minds

Asian stocks traded mostly lower today as concerns about Europe dominated investors’ minds.

The Japanese Nikkei was trading about 1.1 per cent lower while the Hang Seng was also weaker. Only the Shanghai Index was showing some gains in mid afternoon trade.

In Australia, the latest retail data did not come as a complete surprise. The unchanged number in November is only a disappointment when taken relative to market expectations of a 0.4% rise.

Why analysts had expected a rise, when all the anecdotal evidence had suggested a tight environment, is another issue. The anecdotes were so strong that the RBA was even prompted in changing its course and cuttings rates.

That doesn’t mean the November number is bad at all. Instead, we think the most important measure is profitability, not necessarily sales.

A perfect example is companies who during the financial year ending June 2011 managed to grow sales but saw a large decline in their earnings base. True, sales numbers were up but profits are more important and they were under pressure in 2011.

The reason we think cyclical retail stocks have fallen so much over the past few months is that consensus market expectations are finally coming back to more realistic levels.

And not all retailers are doing it tough on the sales front either. Super Retail group is a perfect example. The auto division booked a 3.5 per cent increase in comparable sales, leisure a 9.9% increase and the newly acquired sports division a 7.8% comparable boost.

Based on their price performance and having been oversold the past few months, we think these stocks could outperform – Centro Retail Australia, Harvey Norman, Myer and Ten Holdings.

The first two are backed but a solid retail portfolio. Myer seems to be getting its merchandising right and will no doubt find value hunters when it reports its profit. Ten is perhaps more of a longer term play, undergoing a lengthy cultural change, with upside through an attractive outdoor advertising business in Eye Corp.