Rate cut the hot tip for Melbourne Cup Day, UBS says retailers would be the biggest winners

UBS has flagged good tidings for retailers if the Reserve Bank cuts rates tomorrow, pointing to improved sales after rate rises over the past decade and adding to positivity about the sector from Deloitte Access Economics.

With economists saying the rate pause is over, amid lingering worries over the global outlook and weakened domestic inflation figures, retailers are crossing their fingers that a 25-basis-point cut will boost consumer confidence, and then spending.

It’s a view supported by investment bank UBS, which says Myer, David Jones and JB Hi-Fi are best positioned for a cut.

“Should a rate cut materialise on November 1, we expect consumer sentiment to lift into the key Christmas trading period. That would, in our view be a catalyst for a sales uplift, both in absolute terms and relative to UBS and market expectations.”

UBS analysts Ben Gilbert, Paul Wong and Lindy Newton note that retailers have outperformed for the three months following eight of the past 12 cuts in the RBA cash rate since 2001.

“Of the 12 rate cuts since 2000, retailers have on average outperformed the ASX200 industrials by 6.7% in the three months following a cut,” the analysts add.

The report notes that since 2000, retailers have outperformed eight of the 12 times the RBA has sliced rates, with Myer, David Jones, JB Hi-Fi the best positioned, as well as supermarket giants Woolworths and Wesfarmers.

The UBS prediction comes as Deloitte Access Economics tips a positive outlook for consumer spending in the medium-term.

“Despite the downside risks and challenging conditions at present, the outlook for consumer spending should still be regarded as positive given the underlying strength of the Australian economy with a renewed investment boom underway,” it says in its September outlook monitor, released today.

“If the commodity boom continues to deliver very strong income growth to Australia, lifting retail as a result, it is possible that retailers could face a period of rising retail rents over the next couple of years until additional supply of retail space is completed.”

“Rising rents are usually not welcomed, but the scenario portrayed is one where sales are likely to be rising as well. That may well lay the foundation for a stronger period of retail sector investment.”