Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 395

Why we see opportunities in consumer-related stocks this year

We believe those who view the exceptional profit upgrades from domestic consumer-related stocks over the last few months as being extremely short-term should consider the current spending capacity – and options for spending – of the Australian consumer.

We believe there is a high level of spending capacity left in the domestic consumer sector which is supportive of consumer-related stocks outperforming for a longer period than is factored into current share prices.

The consumer has vastly higher savings, increased wealth via a buoyant real estate and share market, reduced spending options with the removal of international travel and relatively low unemployment on a global scale. Combined, we think these factors put consumers in a strong position for increased spending in 2021 and further into 2022. Couple this with a level of pent-up demand, and we see this as an excellent setup for domestic consumer stocks, either via retailers or domestic travel-related businesses.

Unprecedented retail spending

With increased time spent in lockdown, consumer spending patterns shifted at an unprecedented level, with an initial focus on pantry stocking, setting up the home office and turning to cooking and home improvement jobs. Key outperforming categories were liquor, food and household goods, with the services sector of restaurants and cafes hit the hardest, with many of these changes the largest seen on record.

The consumer was forced to reallocate spending during COVID-19 in a short time period, with many out-of-home spending options removed overnight. Emerging from COVID-19 with limited long-haul travel options, there has been a sustained increase in auto related spending largely related to driving holidays.

Source: ABS, AMP Capital

Limited spending options

Reduced spending options from COVID-19 via limited entertainment and travel – which also drove the unprecedented reallocation in retail spending – have resulted in Australians spending roughly $36 billion less in 2020, with $13 billion of the reduced spend coming from a lack of international travel. Note that international flights and accommodation booked through local travel agents or airlines are not captured in the $13 billion of international spend and therefore this number likely significantly understates the reduction in international travel spend.

Source: RBA, AMP Capital

Additionally, Australians travelling overseas spend more than international visitors spend in Australia meaning there is a short-term net benefit to the domestic economy from the cessation of overseas trips.

Source: RBA, AMP Capital

There is a risk the return to international travel once borders re-open may be slow or more difficult than pre COVID-19 given the risk of unexpected border closures, increased or inconsistent documentation requirements across different countries, as well as a potential period of limited travel corridors providing consumers with reduced travel options. This suggests a longer reallocation of consumer spending than may likely be anticipated by the market.

Record savings

The limited options for spending during the COVID-19 pandemic coupled with unprecedented government stimulus has resulted in consumers saving at record rates as evidenced by the household savings ratio which is at an all-time high.

Source: ABS, AMP Capital

Looking at savings in dollar terms using APRA data shows the huge spike in deposits, with the total level of household deposits increasing by $113 billion since end of 2019. For context, ABS retail trade data showed total retail trade spending in 2020 of ~$343 billion, meaning consumers have roughly one third of the total annual national retail spend sitting in additional bank deposits.

Source: APRA, AMP Capital

Concluding thoughts

In summary, while there are always risks to consider during a pandemic, we believe there are important investment themes this year in Australia:

  1. Consumer savings are at record highs and the economic environment is strong.
  2. There is pent-up demand from the consumer.
  3. Australia’s management of the virus is world leading, but international travel is unlikely for some time.

 

Kent Williams is a Small Caps Analyst at AMP Capital, a sponsor of Firstlinks. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. For a list of sources and important disclaimer information, see the original article here.

For more articles and papers from AMP Capital, click here.

 

RELATED ARTICLES

The next big thing: global markets and the emerging consumer

The surprising resilience of residential housing and retail

Five industries profoundly changed by COVID-19

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.