Global equity markets remain in limbo before next weeks all important US Federal Reserve Meeting. While
the US share market managed to snap a 4 day sell-off, other global markets continued to slide. We believe
markets will grind higher as we head into the end of the year which is usually a quiet trading period.
At The Minute insights
A Merry Xmas for Retailers?
Global equity markets remain in limbo before next weeks all important US Federal Reserve Meeting. While
the US share market managed to snap a 4 day sell-off, other global markets continued to slide. We believe markets will grind higher as we head into the end of the year which is usually a quiet trading period. In saying that, one sector which will be the focus over the Christmas period is retail, and in today’s daily we discuss our views on the retail sector.
The Situation
Since the global financial crisis, retailers in Australia and New Zealand have performed poorly. There are a
number of reasons for their poor performance, as lower discretionary spending, a high AUD & NZD, and
poor business models have been the major drags on the industry’s performance. One of ’s top
thematic portfolio views is that a there will be a “Spending Spree” resulting from a bounce back in retail trade. Interest rate cuts from the Reserve Banks across both sides of the Tasman look to be finally taking effect and the retail sector has historically been an early and key benefactor of lower interest rates. While we are positive on the retail sector from an economic point of view, we are still very selective in terms of picking retailers we believe will outperform such as Myers, which has had a strong share price run of late.
Equities
While we are positive on the retail sector, we remain selective as to exactly which companies we own. It
is important to be selective in choosing stocks for your portfolio. Knowing which stock to buy can have
material benefits for your portfolio over the longer run. For instance, Wesfarmers and Woolworths both
operate in the retail sector. Despite competing in identical markets, Wesfarmers has significantly
outperformed Woolworths (by over 20% – see chart below). There are a multitude of reasons for the
outperformance and without being aware of WOW’s limitations an uninformed investor would have also
performed poorly. At the same time one of our top retailers has already added 28% to our performance
since being added to our portfolio in October. We believe this is set to continue as the company benefits
from higher discretionary spending and improvements in their operating model.
Currency Impact
Over the past few years a high Australian and New Zealand dollar have hurt retailers as consumers took
advantage of high currency levels and purchased goods online from other countries. However in more
recent times the fall in the AUD and NZD has meant consumers are shifting their focus back home and back to “brick & mortar” stores rather than shopping online. We believe this trend is set to continue.
Christmas
Recent retail sales in Australia for the month of October were stronger than expected at +0.5%,
representing the third consecutive month of improving retail numbers. Christmas tends to be the most
important time of the year for retailers. Despite being competitive, it is when the majority of retailers
generate the highest amount of sales. It is critical for their operating performance that they have a strong
Christmas period. Generally their stock is very seasonal and retailers also tend to carry higher levels of
inventory over the festive season. If they are unable to shift their inventory it can lead to the retailer being
forced to discount heavily in the new year in order to sell their product. This significantly impacts on the
company’s performance and is why investor should take great interest in the strength of Christmas sales.
Chart of the Moment – Merry Christmas?
The chart of the moment illustrates how important it is to be selective in your portfolio picks. Since 2003
Wesfarmers is up almost 2% compared to Woolworths which is down 20%. Both have similar business models yet WES has fared much better in what has proven to be a challenging environment
for retailers.
believes that WES outperformance could continue for some time or until WOW addresses
their structural issues.
Five Things Markets Will be Watching this Week
1. Whether global markets can follow the US moves on Friday and reverse the sharp sell-off experienced by markets at the end of last week.
2. The Reserve Bank of NZ will make a monetary policy decision on Thursday. While we believe there is likely to be no change to the official cash rate (OCR) this month, and hints of the timing of further rate cuts in 2016 will be looked for.
3. European GDP numbers will be released on Tuesday, and the health of the European economies will be a key factor in determining whether the European Central bank needs to provide further stimulus.
4. The performance of the US dollar this week will be in focus, as to whether it gains strength on the back of a higher likelihood of a hike by the US Fed, in our view.
5. China export and import data is due to be released on Tuesday, and will be watched closely as investors assess the level of slowdown being experienced in China.