The economy may be "mixed at best", but Deutsche Bank Aussie equity strategists see opportunities to add some "Christmas cheer" to your shares portfolio among the battered listed retailers.
"Historically reliable indicators such as NAB business sentiment and employment are very strong, but we still can't reconcile them with other measures," the strategists write in a note to clients. "For example, earnings revisions for small industrials tend to move with business sentiment, but are currently a little below average. And despite strong jobs growth, consumer sentiment is poor, thanks to low wages growth."
Those ASX-listed businesses relying on discretionary spending are particularly out of favour with investors right now, the strategists write. In fact, they continue, on "our scorecard they come out as the most unpopular parts of the market".
But the Deutsche Bank team see a "tactical opportunity" to make some money in an unloved sector. Or, as they put it, to "add some Christmas cheer to the portfolio". They put up two reasons.
First, and as mentioned, they are heavily out of favour. And when the market is crowded in one direction, there is always the chance that the pessimism has gone too far and liable for some reversion.
Hedge funds have "high levels of short interest" in discretionary and food retail names, the strategists write. But with these stocks trading on relatively low price-to-earnings multiples, "there's the risk of a squeeze higher if Christmas spending is reasonable".
Second, households are generally speaking "income poor" â amid historically low wages growth and ramping households costs, such as in electricity and childcare. But they are also "asset rich", the bank's analysts write.
Household net worth is at record highs at about 7½ times annual income, they calculate. And that "wealth effect" may give Aussie shoppers the confidence to spend more over the holiday period.
"Rising wealth tends to lead to a lower saving rate," they write, and further falls in this rate could bankroll more spending.
The strategists add JB Hi-Fi and Scentre to their model portfolio, up their exposure to Woolworths, and continue to hold Harvey Norman.
Elsewhere, the Deutsche Bank team cut their exposure to the banks to "neutral" from "overweight", referring to their portfolio's exposure relative to the weightings of the ASX 200 benchmark index.
The banks' "revenue growth could be pressured," they explain. "Our lead indicator points to a slowdown in credit growth, and the benefits of re-pricing have largely passed."
"Further, analysts have become more upbeat with more 'buy' ratings â that's historically been a bad signal for subsequent performance."
Following the recent share price bounce, they switch from Commonwealth Bank to NAB.
Miners, on the other hand, "still look like a good sector to own".
"The broad Asian growth cycle is in good shape, based on earnings revisions and exports," they write. "China's nominal growth indicators are still firm, and neutral monetary conditions should prevent much of a fall in commodity prices."
The sector remains in "earnings upgrade mode" based on current commodity prices, and "free cash flows are very strong". They like Rio Tinto and BHP, but remove South32.