LONDON, Sept 11 Reuters European retailers have been unlikely stock market stars this year, but a long spell of high borrowing costs and inflation has started to bite, so wary investors will be looking for reassurances from the likes of HM and Zaraowner Inditex when they issue business updates this week.

Last year, investors and strategists expected retailers39; margins to take a hit, as inflation eroded households39; discretionary spending and some of the region39;s heavyweights warned of tough months ahead.

This gloomy forecast did not play out, with retailers largely able to pass costs on to consumers as demand proved more resilient than initially feared. The STOXX retailers index is up a whopping 25 to date making it the best performing sector so far in 2023 after it was secondworst last year next to real estate.

The broader STOXX 600 is up by 7 this year, meaning retailers are outperforming by the most on record.

The snag is that this stellar run has been partly built on investors unwinding bearish bets, or short positions, on retail stocks, after last year39;s pessimism proved overdone. This means retail stocks might not see as many willing buyers as earlier this year.

In 2022 short sellers had built positions in the sector and those have been unwound, said Benjamin Jones, Director of Macro Research, Fundamental Multi Asset team at Invesco.

Wed be more worried about fundamental weakness starting to show up more clearly in the coming months.

Jones expects…