Retailers feeling the heat (or lack of it!)

You might have seen City Chic (ASX: CCX) out with a capital raise and a trading update indicating sales were down some 30%, and today KMD Brands  (ASX: KMD), owns Rip Curl and Kathmandu, out with a materially slower than expected start to the winter trading period. 

These are retailers under pressure, with share prices to match. 

Then there was today's flash Purchasing Managers' Index (PMI) for June, printing below consensus, and looking very soggy. These data attempt to measure trends in the economy. Up is good, down is bad, with 50 as the baseline to indicate expansion vs contraction relative to the prior month.

In our view, Australia is running a real risk, with the unfortunate combination of a hawkish central bank, high household indebtedness, elevated mortgage rates, and the economy slowing rapidly. All of this is weighing on the consumer, who is very stretched. 

Looming in the background is the very large and real housing shortage, which will not be solved through tighter policy, and given building approvals are down materially, is only likely to get worse before it gets better. House prices are high, and yet no-one can afford one, and builders are going bust, as indicated by the recent highs in the ASIC insolvency data.

All of that sounds bad, and is reflected in the survey data, especially the business and consumer confidence surveys. Yet, it is also worth noting the survey data would not have made you any money at all, these past few years, if you based your asset allocation upon them, to any great degree. Look at the ASX 200, in contrast to the graphs above and below.

And that makes life very difficult. You've got "soft" data (surveys, like those shown above) that shouts "important, look at me", but haven't mapped at all well onto "hard" data (measures like consumption, GDP, employment) and least of all the stock market, particularly, the consumer discretionary stocks, which on average have done superbly.

It's the sort of market that can make you capitulate your long-held views, only to see them arrive just as you change your allocation. 

I think that is the number one risk to guard against, in the current market. Signs of froth abound, and it can be very easy to lose your way.

For us, diversification remains key. There are pockets of value abroad (European equities, UK equities, Emerging markets, Small companies, Value stocks) and even within the US, which at first blush looks expensive, by appealing less to cap-weighted indices and more towards equal-weight ones.

Going offshore can also allow you to diversify your currency exposures, depending on the mix of hedged to unhedged that you choose.

Within domestic equities, we continue to favour the defensives over the domestic cyclicals.