Shares of Australian retailers are at their cheapest level in over a decade and could prove to be a good buy for investors despite sector headwinds, according to Heuristic Investment Systems.
The firm's director and co-founder Damien Hennessy said cyclical retailers on average were trading on a forward multiple of 8, the lowest in 15 years.
"The highly cyclical retail sector is 35 per cent undervalued compared with the traditionally defensive utilities sector, based on consensus earnings estimates," Hennessy, also a consultant to van Eyk Research, said yesterday.
"This is close to the lows experienced in 2001 and 2008, which were followed by sharp rallies of around 40 per cent."
His comments came even as major retailers including David Jones, Myer and Harvey Norman recently have warned of challenging trading conditions due to weak consumer sentiment.
However a series of interest rate cuts, which are looking increasingly likely, could provide the catalyst for a recovery in consumer confidence and the sector, he said.
"One of the problems for the sector has been the threat of higher interest rates, higher mortgage rates and higher currency," Hennessy said.
"Now if we start to reduce the pressure from those either through rate cuts or maybe a slightly weaker currency that will at least start to support the sector. I'm not saying that the sector is poised to pop, not by any stretch."
He said the cash rate would need to be slashed at least 75 basis points by the Reserve Bank of Australia (RBA) to boost sentiment and expects cuts to occur over the next six to nine months.
"Our indicators are suggesting they should be moving towards cutting rates. Employment growth has slowed while capacity utilisation and business conditions are consistent with an easing," he said.
Last month listed investment company WAM Capital said it expects interest rates to fall in the next 12 to 18 months, a move that will eventually boost equity valuations and economic activity.
"I believe the east coast in Australia is in recession at the moment," WAM Capital chairman and portfolio manager Geoff Wilson said.
Westpac also expects interest rates to fall by 1 per cent, starting with a reduction of 25 basis points in December and the remainder through 2012.
The bank's chief economist Bill Evans said the forecast was made after the Westpac Consumer Sentiment Index for July plunged 8.3 per cent.
The Reserve Bank of Australia has lifted interest rates from 3 per cent to 4.75 per cent over the period from April 2009 to November 2010.
