Cyclical stocks undervalued due to interest rates
Australian retailing stocks are trading at close to their lowest valuation in 15 years, but an ease in interest rates may very well provide the catalyst for a market recovery, according to van Eyk Research.
According to consensus earning estimates undertaken by Heuristic Investment Systems, the retail sector is 35 per cent undervalued, compared with the traditionally defensive utilities sector.
The research found that this figure is close to the lows experienced in 2001 and 2008, which were quickly followed by sharp rallies of around 40 per cent.
According to Director of Heuristic - and a consultant to van Eyk - Damien Hennessy, the factor preventing retail stocks clawing back is a cut in interest rates.
StrategyEngine, a software developed by Heuristic to analyse and determine which data drives markets, found that there are six indicators which determine interest rates in Australia.
"The factors that we would look at would be NAB business conditions, capacity utilisation, employment growth and unemployment rate over a three month period, implied inflation expectations, as measured by the bond market, and the US ISM Index, which is a good measure for global growth," Hennessy said.
"Our indicators are suggesting the RBA will be focused on the unemployment rate and the implied inflation expectations, so they should be moving towards cutting rates by 2012."
Hennessy considers the retail industry as the ultimate discretionary sector of Australian domestic cyclicals.
"It's been right to be defensive on the equity market and undervalued retail stocks," he said.
"Now, with the pressure building up for an easing in policy, we're getting close to that point where the retail sector can have at least some of the headwinds they've been facing for the last 12 to 18 months removed," he said.
AUTHOR
Andrew Tsanadis
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