Global equity markets ended the year with moves lower as the oil price hit an 11-year low, dragging down
investor sentiment. In saying that, the Australian and New Zealand equity markets managed to make further gains over the Christmas period. Across Australia and New Zealand a sector which looks to be benefitting from lower interest rates is retail, and initial indications point to strong sales over the crucial Christmas period, which we discuss in today’s daily. One of our key retail picks is Myer – we continue to be vocal supporters of the Myer turnaround story and have captured over 35% of returns from the stock.
At The Minute insights
Merry Xmas Myer
Retail: Indications of Strong Christmas Sales
The holiday season is always an important and closely watched period for retailers and initial media reports point to a very successful trading period, which is encouraging for our key retail portfolio holdings. The Australian Retailers Association has claimed that Boxing Day sales have exceeded the forecast margin of $2.3 billion for Australia and “Sale activity is expected to be stronger across all states compared to last year, with positive consumer confidence, record low interest rates and falling unemployment contributing to growth” the council’s chief executive Anna McPhee said. At the same time, Myers Boss Mr Umbers has said that “We haven’t shared any specific numbers about how Christmas is tracking but I guess you can pick up a sense of customer enthusiasm in the market place at the moment, we have been thrilled to see the number of customers coming through our doors”.
Low Cash Rates Spurs Spend
A low cash rate spurs consumer confidence in addition to giving consumers more discretionary income to
spend. A majority of business and households have floating rate mortgages and loans. A lower cash rate
results in a reduction in the interest bill on borrowings and as a consequence gives consumers more
discretionary income. Because they feel relatively richer it helps to boost confidence which also encourages them to spend. This In turn helps to drive economic growth and support growth in the underlying economy.
Retail “Spending Spree”
Retail as an economic driver is becoming more influential in both Australia and New Zealand. As Australia
transitions away from the mining boom, new economic drivers are needed to replace mining. Currently,
retail only accounts for 15.2% of total GDP, but we expect this to grow materially as economic resources are relocated to growing industries. For example, in the UK retail accounts for 22.5% GDP. A ‘Spending Spree’ is a key thematic and we believe that the low cash rates with drive economic growth within the sector. As a result we hold a number of Australian consumer facing stocks in our portfolio.
Chart of the Moment:
MYR has been held in our Australian portfolio since October 2015 and generated impressive performance.
Major retailers such as MYR should benefit from the increased consumer spending across Australasia which should provide further uplift to the company’s sales growth, in our view. has already captured over
35% of share price performance from Myer and we believe there is more to come.
Five Things Markets Will be Watching this Week
1) How global equity markets will trade in the first week of the year, and particularly whether they
can reverse recent losses.
2) Chinese manufacturing data has recovered somewhat of late, and further data will be released
early this week.
3) US employment data will be released later in the week, and the market will look for continued
strength to support further interest rate hikes by the US Fed.
4) The Oil price – whether the free-fall in the oil price will halt or reverse will be important for both
energy stocks and market sentiment more generally
5) Dairy prices will be released early in the week, with a recovery important for several agricultural
stocks held in our portfolio.