Retail Europe (RTA) : damage, control in process

RTA (Lyxor ETF) replicates the Stoxx Europe 600 Retail index (SXRR) which is composed of the main European retail stocks.

This index is relatively concentrated, with only 29 holdings. The index is mainly composed of large capitalisations, with Inditex at the first place, which accounts for 15% of the index and has more than €100bn market capitalisation.

The true advantage  of this basket is its diversification from a business perspective. It is composed of food retailers stocks, i.e. hypermarkets (Tesco, Carrefour, Ahold, casino...), which are generally structurally defensive, but for some are in the search for new business models or to refocus on their domestic markets, because of difficult emerging markets and sometimes excessive debt. Other companies such as Inditex, Next, Hennes & Mauritz or Kering are rather related to textile/fashion therefore essentially growth stocks, while this index also includes stocks such as Kingfisher which are specialty distributors with a predominantly cyclical business model. All in all a varied Index with moderate volatility, while Inditex is a pole of stability by its weight and growth momentum.

The expenses of this ETF are relatively moderate at 0.3%. The Fund is rather illiquid at 13 M €, which makes it a diversification product only.

The sector posted a negative performance of -5.8% in 2016, underperforming the Stoxx600 and lost 0.5% since the beginning of the year. The index lagged the rest of the market, hurt by a lack of catalyst and weak consumption in Europe. But the recently purchasing of Whole Food Markets for US $13.7 bn by Amazon is seen as a direct threat to the large Food retailers, and primarily those with a US base, such as Ahold Delhaize. The stock fell by more than 15 per cent within 2 days after the announcement. This threat will probably not have an immediate impact on the margins of traditional retailers, but will further tighten the competitive environment and further cloud the long-term outlook, which could justify a higher risk premium for investors.

In the short term, however, the reaction is probably excessive.