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 have found1 that there is a high level of spending capacity left within the domestic consumer. Coupled with fewer spending options in the near term, we believe this is supportive of domestic consumer-related stocks outperforming for a longer period than is being factored into current share prices.
In this context, we have a situation where 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 scale2. 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 reduced spending options and increased time spent in lockdown, consumer spending patterns shifted at an unprecedented level, with an initial focus on pantry stocking and setting up the home office turning to cooking and home improvement jobs. Key outperforming categories were liquor, food and household goods, with the services sector of restaurants and cafes being 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 consumer spending across multiple categories from home improvement and home furnishings to auto related spending related to driving holidays.
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 – therefore this number likely significantly understates the reduction in international travel spend.
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.
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.
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.
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.
In summary, while there are always risks to consider during a pandemic, we believe there are some important things to remember this year about the Australian market:
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.
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