Has this ASX sector hit rock bottom? Is it time to buy in?

‘Buy low, sell high’ is a timeless investment axiom, but it’s easier said than done.

After all, if you want to buy ASX shares for cheap, you need to be at least a bit contrarian.

And this means backing a company when it’s friendless among other investors. Buying in at such a time takes genuine courage.

Through all the turbulence seen in share markets in 2022, one of the sectors that investors have abandoned is retail, especially those that sell discretionary products.

The logic is that as interest rates rise, Australians will have less to spend. When people have less cash to burn, the first items they will cut out will be those that are not necessary for survival.

Take City Chic Collective Ltd (ASX: CCX) and Dusk Group Ltd (ASX: DSK) for example. Those ASX shares have dropped a painful 74% and 46% respectively so far this year.

‘Bearish sentiment is at a low ebb’

Earlier this month, Montgomery Investment Management founder Roger Montgomery revealed his fund had reduced its exposure to retail.

“The reasons we are underweight discretionary retail is because they are underperformers in an inflationary environment,” he said on the Montgomery blog.

“Declining house prices represent inescapable quicksand on spending, and if they are growth stocks, their price-to-earnings ratios are vulnerable to further compression.”

But only a couple of weeks later, he thinks there are signs retail stocks may have bottomed.

“The comments we subsequently received pointed out that bearish sentiment is at a low ebb, and reflected in single digit price-to-earnings ratios for even high quality retailers,” Montgomery said this week.

“Those observations are indeed reasonable, and so it now falls on the investor to determine whether positive changes are evident in the world of consumer spending and retail sales.”

Another encouraging sign, according to Montgomery, is that inflation expectations are starting to ease.

“Expectations for the inflation rate for the next 12 months have declined to 4.6% from 4.8% in September,” he said.

“That is the lowest reading in 12 months and the third consecutive decline. The [US] Federal Reserve action on rates is having the desired effect, preventing high current rates of inflation from dangerously feeding into higher expectations for the future.”

Montgomery noted that the inflation expectations for the next five years have dropped to 2.8%, which is the lowest in 14 months.

Consumer health is much better in Australia than elsewhere

In Australia, ‘consumer health’, as measured by Goldman Sachs, is faring much better than in other advanced economies.

“Their consumer health average registers around percentile 35 in the Euro Area and the UK, down from around 50 three months ago… The average stands at around percentile 40 in the US and percentile 50 in Canada, down from 70 three months ago,” said Montgomery.

“On the positive side, their consumer health average sits around percentile 60 in Japan and Australia, down only slightly from around 65 three months ago.”

All this, for Mongtomery, means that Australian retail stocks may be oversold.

“It does look like Australian retail stocks have fallen in sympathy with their overseas counterparts,” he said.

“However, those declines might be undeserved, at least for retailers with no overseas exposure.”

So those very ASX shares that his fund has shunned in recent times could be prime targets now for those seeking to buy at the bottom.

“Single digit price-to-earnings ratios for even high quality Australian retailers could represent a bargain, if the benefits of global store rollouts offset the weaker stats coming out of those foreign domiciles.”

The post Has this ASX sector hit rock bottom? Is it time to buy in? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has positions in Dusk Group Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs. The Motley Fool Australia has recommended Dusk 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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