Retail shares had a stellar run in 2012 as the seemingly insatiable appetite of foreign investors continued to drive valuation‚ boosted by hype around Africa's growth prospects.
Since the fallout experienced by commodity shares after the 2008 recession‚ JSE-listed retailers have become the flavour du jour
for foreign investors seeking higher yields.
The majority of SA's listed retailers have showed strong profit growth‚ despite challenging economic conditions‚ as the rise in middle-class consumers escalates.
According to professional services firm PricewaterhouseCoopers (PwC)‚ SA has the biggest retail market in sub-Saharan Africa‚ and the 20th largest in the world.
"Compared with the rest of Africa‚ SA's retail market is already a juggernaut. In 2011‚ retail sales surpassed a trillion rand for the first time in history. By 2016‚ this is expected to swell to R1.46trn‚" PwC said in a report.
Independent analyst Ian Cruickshanks says there has been "really significant" buying from new foreign shareholders and that has built up "quite considerably".
"The primary force has been foreigners' interest in our retail sector. They seem to have seen more in the sector than domestic investors who keep saying the sector is expensive - they said that in the middle of last year and are're still saying it now‚ but the foreigners keep buying‚" he said.
Shoprite trades on a price:earnings ratio above 32. Mr Price‚ Woolworths and Truworths are all trading above 20 while the Foschini Group is trading in the high-teens.
Cruickshanks says foreign investors are eyeing the retail markets in the rest of Africa.
"Just look at Shoprite and what its done - they've been leaders in moving from SA into the rest of Africa. They have noticed that the margins in retailing outside SA are quite a lot higher than the margins within SA. So that's been an attractive growth area - there is a lot of potential on the continent and SA companies are ideally placed to exploit it‚" he said.
Shoprite's non-South African supermarkets operate in 16 African countries.
"In the domestic sector‚ so many wage increases have been way beyond inflation and this has increased spending power quite considerably‚ much faster than the actual growth in retail goods prices‚ so shareholders have seen the benefit already or look to it for future benefit‚" Cruickshanks said.
Earlier this year‚ Mr Price announced the appointment of New York-based financial services company‚ BNY Mellon‚ as the depositary bank for its American depositary receipt programme. The listing of depository receipts on the US over-the-counter market allows US investors to invest in the local retailer.
Chris Gilmour‚ an analyst at Absa Investments‚ says the listing is an affirmation that the company "has arrived".
"US investors like this share because‚ although it's nominally categorised as being an emerging market share‚ its got outstanding first-world management and from time to time they're going to be able to participate in emerging market growth‚ both in SA and the rest of Africa‚" Gilmour says.
There has been some concern from market analysts over lofty valuations of retail shares.
Drikus Combrinck‚ Portfolio Manager at PSG Konsult‚ says that over the last decade there have been a few factors that have played in favour of the retailers.
"Interest rates moving from 25% to 8.5%; we've also had a major windfall in this country in the form of the biggest resources super-cycle in over a hundred years and that has benefited discretionary spending; personal debt to GDP has gone up from 35% to 76% in the last decade.
"None of these will happen again over the next ten years‚ but they are priced as if the same factors are going to support them in the future and I'm afraid it's not going to happen. They are over-valued‚" Combrinck said.
Cruickshanks said: "Over-valued is when prospective shareholders will no longer buy the stocks. If they were over-valued‚ why don't we see sellers? We don't see any of the big asset managers saying they are too expensive‚ throw them out‚ let's go and look for better value elsewhere‚ they simply say‚ yes they might be expensive but not so much so that we could recommend a sell. I can't say the sector is over-valued."