Three reasons to short the retail sector

Don't be fooled. At the top end of the market, luxury brands such as Mulberry and Burberry may be having a great run based in part of feeding consumer appetites in China. However back in the UK things look especially grim for our middle to low-end retailers. Fortunately spread betting allows you to bet on falling prices as easily as betting on rising ones. Here are three reasons to short UK retailers.

Consumers are on their knees

The most closely watched barometer of consumer confidence the GfK NOP poll recorded what the group calls an "astonishing collapse" in January as the VAT rise kicked in. There have only beensix comparable slumps (the latest waseight points to -29) in its 35-year history. Spooked by tax rises and government austerity measures UK consumers are running scared. UK retailers should be too.

Bellwether John Lewis is struggling

In the week to 22 January, John Lewis said its sales fell 2.2%. This slowdown "was particularly notable as the company has been clearly out-performing the retail sector as a whole" said HIS Global Insight economist Howard Archer. He added, "consumers are becoming increasingly less prepared to spend". Trouble at John Lewis perceived as a popular, well-run, flagship UK retailer spells trouble elsewhere.

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Inflation

There's no two ways about it inflation is back. The retail price index is now running at 4.8%. Meanwhile the consumer price index targeted by the Bank of England when it sets interest rates is at 3.7%. Two of the ECB's senior policymakers are warning of a "tide of imported inflation" for "advanced countries". Right on cue, German inflation is at a two-year high. Inflation is a double whammy: it puts pressure on consumer budgets (many either fear for their jobs or will not see much of a pay rise this year).

Then there's the added threat of rising interest rates and the knock on effect for mortgage costs. Of course, central banks have been busy reassuring everyone that rates will not need to rise too far too fast they have little choice if they want to head off an outright collapse in confidence. But that won't stop nervous consumers tightening their belts and with good reason.

Don't forget that shorting shares or even an entire sector is risky in theory your losses are unlimited if prices rise instead of falling. So always consider stop loss orders to limit the damage.