Retail shares continue to be first in the firing line to be shot by the stockmarket as the British consumer struggles with George Osbornes’ austerity plan.

The tax rises haven’t even started to bite yet – they only kick in come April 2012.  Yet Tesco has already disappointed the market (its shares fell 20% after its Christmas update) – the market is starting to appreciate that food retail stocks are not as defensive as they used to be.

It is clear that shoppers are trading down to lower price points, as we saw from ABF’s recent announcement that its’ Primark stores enjoyed sales growth of 10% in 2011 with “particularly strong Christmas trading”.  Primark has even been expanding into Spain and Portugal by opening new stores in two of the eurozone’s struggling economies (the Spanish unemployment rate rose to 23% in Nov 2011).  Primark’s new stores added another 6% of floorspace, taking reported sales growth up to 16% for 2011.

The tale of woe includes carpet retailer Carpetright, video games retailer Game, music retailer HMV, clothing company Peacocks, Hornby (toy trains & Scalextric), Argos, Comet, Blacks Leisure, and the list is likely to lengthen further as 2012 progresses.  Avoiding the sector entirely is the best strategy for sensible long-term investors who can simply choose not to play the fund manager games of underweighting the retail sector by 3.1415926% in order to overweight a defensive sector by 2.71828183%…

It is two years since I first suggested long-term investors avoid retailers and it looks like the sector has yet to fall far enough to discount all the upcoming bad news.  At some point the retail bankruptcies will subside and the survivors will enjoy a bigger market share, but the sector is a long way from its nadir.  When it looks like the sector is nearing its low (the first clue will come when the share price of a big retailer does not go down on a profits warning), investing in the big blue chips of the retail sector will be the sensible trade because buying a struggler which subsequently goes bankrupt will only harm your portfolio and the strugglers tend not to pay dividends (which tide the sensible long-term investor over whilst they wait for the upturn).