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No credit cold turkey will be painful
Effects of low demand will be
accentuated by input inflation pressures
We downgrade Next from Neutral (V) to
Underweight (V), with an increased
target price of 1,020p from 1,000p
The temptation for many senior retailers to extend their
traditional winter sojourn in the Caribbean must be intense.
Never mind the nightmare on Wall Street, Oxford Street will
be no place for a picnic in the coming months. Filing a
January trading statement from Barbados would be very
attractive were it not for the signal it would send to
beleaguered troops.
HSBC has recently lowered its expectations for consumer
spending growth in 2009 to from +0.5% to -0.2%. In our
view, the impact on consumers of the rapid cut back in credit
supply has yet to be really felt. Consumer confidence, so
influenced in the UK by the state of the housing market, is
destined to remain febrile for some time. Indeed, it is
difficult to forecast when the mood will improve. One ray of
light is of course an improving inflation outlook. However,
before that happens, households will have to suffer the pain
of vastly inflated energy bills post Christmas. This will
depress the willingness to spend for some time, in our view.
So, our overall sector view remains resolutely negative, and we
would not be suckered into becoming an early bull in
anticipation of rate cuts (first now forecast by HSBC for
October). Our key Underweights (all classified as volatile)
remain Home Retail and DSGi. We have added Next,
downgraded from Neutral (V). In a volatile market and sector,
there will be trading opportunities. In the very short term, we
expect the Q2 trading statement from M&S, Neutral (V), target
price lowered from 310p to 240p, (2 October ), to cast another
pall of gloom over the sector. We expect management to
disappoint any hopes of recovery solutions.
Our remaining Overweights fall out of the retail mainstream:
Inchcape (volatility indicator added) preserves its
geographical diversification merits and, while emerging
markets exposure is less the magic ticket than six months
ago, the shares look oversold. Travis Perkins (volatility
indicator added) has been besieged by UK construction
worries, but also looks oversold against its peers, where the
bias of the sell-side has turned positive. We also like HMV
(classified as volatile): in a Christmas when pennies will be
counted, a £10 CD or £14 DVD is an affordable gift, and the
release schedules look impressive.
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