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Further opportunity in retail stocks in 2021

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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. Analysis as at 15 February 2021. This information has been provided by Firstlinks Pty Ltd (ACN 161 167 451), a Morningstar publication, for WealthHub Securities Ltd ABN 83 089 718 249 AFSL No. 230704 (WealthHub Securities, we), a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited ABN 12 004 044 937 AFSL 230686 (NAB). Whilst all reasonable care has been taken by WealthHub Securities in reviewing this material, this content does not represent the view or opinions of WealthHub Securities. Any statements as to past performance do not represent future performance. Any advice contained in the Information has been prepared by WealthHub Securities without taking into account your objectives, financial situation or needs. Before acting on any such advice, we recommend that you consider whether it is appropriate for your circumstances. This article does not reflect the views of WealthHub Securities Limited.