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It’s the nightmare before Christmas folks – we were expecting this in January, but it seems to be happening now. A massive sell-off in retail stocks is weighing on the FTSE 100 and FTSE 250 indices with investors worried about disappointing Christmas trading.

Mining stocks have bucked the trend with a small advance. This included BHP which confirmed details of a $1.02 per share special dividend linked to the sale of its onshore US assets. Markets were also weak in Europe. But the big story seems to be what is happening to UK retailers, a trend The Armchair Trader has been following all year long.

ASOS results: “investors are increasingly losing hope”

“It seems investors are increasingly losing hope of a stock market rally going into Christmas. They simply want the final run of trading sessions to be over, so they can put their feet up in front of the fire with a mince pie and not think about the damage to their investment portfolio until the festive season is over,” says Russ Mould, investment director at AJ Bell.

The vehemence of the response to today’s profit warning from online fashion retailer ASOS reflects several key factors. First, this is generally what happens when a company which is priced for growth fails to deliver. Prior to today’s big sell-off, the shares were trading on a forward earnings multiple of around 40-times. This left little margin for error.

Second, and perhaps more importantly given this is why many of the company’s listed peers are also under the cosh, today’s news suggests the retail sector is both cyclically and structurally challenged. Or in other words, it is not just that we’ve stopped shopping on the high street, it is that we’re spending less overall.

UK retailers need to respond to the digital challenge

Everyone knew bricks and mortar retail was in trouble; after all, why struggle out to the shops and battle the crowds when everything you want is available at the click of a button from the comfort of your own home?

The read-through from ASOS’ results is that consumers are feeling sufficiently nervous to put off purchases no matter how they make them. This will strike fear into other internet-based retailers and more traditional rivals who were banking on their web-based portals to get them out of trouble.

“The alternative, which seems unlikely but can’t be ruled out entirely, is that this is more of an ASOS-specific issue, ” says Mould. “Fashion is fickle and perhaps ASOS was not quite as on top of what its shoppers want as it has been historically. Interestingly, BooHoo has put out a statement which says its own trading remains strong.”

With just a week left of crucial Christmas trading we should have our answer to whether this is a micro or macro issue as January trading updates trickle in from across the sector. At The Armchair Trader, we think this is going to be a bigger deal. Traders were selling some big retail names this morning:

“Sentiment is building against UK-listed retail stocks which were leading the FTSE 100 down in early trading this morning,”  according to Fiona Cincotta, an analyst at City Index. “This follows ongoing reports that shoppers are simply not spending enough in the shops in the run up to Christmas. Investors are getting nervous, and they are generating a lot of red in some major retail names, all down over 2% in the first hour. Among these are Next, Ocado, and M&S.”

Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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