At Ausbil Investment Management, we believe the outlook for Australian retailing is looking positive and bodes well for the run into the key Christmas (December 2016) and clearance (January 2017) period. The first half of 2016 was less favourable for retailing with consumer confidence negatively impacted by the prospect and uncertainty of the Federal budget in May, an unprecedented protracted national election campaign and the surprise Brexit outcome. With those events having passed, interest rates at historic lows and a relatively benign, if not positive, macroeconomic environment, Australian retailers look poised for a relatively strong end to the year.
Online sales growth continues to outpace Australian Bureau of Statistics (ABS) retail growth. Australian consumers spent round
$20.6 billion over the 12 months to July 2016, which is equivalent to 7% of spending at traditional ‘bricks and mortar’ retailers.
Australia, however, is still well behind its international peers with the USA estimated at 12% and the UK at 15%, where the highly competitive online retail environment has been driven by innovative retailers such as Amazon.
The Australian currency at around US76c provides a positive backdrop for domestic online retail spending, given the price arbitrage for offshore internet spending is generally uneconomic as it is generally cheaper to buy in Australia than from an overseas website.
The internet and online shopping facilitated the entry of global brands into the Australian retail market. With increased competition, domestic retailers will continue to face significant challenges. The major International players continue to enter and expand in the Australian market. For example, in the last few years, fast retailing powerhouses Zara, H&M and Uniqlo entered the Australian market with ‘bricks and mortar’ stores, followed by cosmetics retailer Sephora. Luxury international brands are among the latest wave of global retailers expanding operations in Australia as evidenced by brands such as Cartier, Moncler, Valentino and French luxury giant Kering, which owns brands such as Alexander McQueen, Balenciaga and Gucci.
Economic drivers supporting retail spending
While mining has long been a major driver of Australian economic growth, around 80% of the economy is actually derived from services. The mean reversion in the AUD/USD to circa US76c, coupled with historic low interest rates, has underpinned a
rotation back to domestic focused activity, led by housing, tourism and education. In fact, two of the key drivers of the Australian economy, residential construction and population growth, continue to provide support for retail spending.
Australian housing market conditions have been responding positively to the reduction in interest rates in recent years.
Population growth has also been an important driver of new dwelling construction growth and the refurbishment of existing homes. The number of newly approved dwellings has been above completions for some time, which suggests a continuation of solid housing activity, particularly in New South Wales and Victoria, where population growth is exceeding the national average for the first time in 20 years.
While housing market conditions overall appear to have eased since the previous year, the dwelling construction cycle remains in a strong upswing. Housing prices have risen modestly over the past year and turnover has been below average, which when coupled with supervisory measures that have strengthened lending standards in the housing market, have seen housing credit growth slow over 2016.
Household consumption growth is expected to be maintained around average levels. The Reserve Bank of Australia (RBA) recently noted that lower interest rates can be expected to boost overall consumption, since borrowers benefitted more from low interest rates than the offsetting opportunity cost incurred by depositors. Since the global financial crisis however, borrower households have been likely to use more of an increase in their cash flow to prepay debt with the risk that this might delay the response of consumption spending to lower interest rates.
The lower exchange rate since 2013 has continued to support activity in the traded sector of the economy. The AUD is at the top of the RBA’s fair value range, which is equivalent to being about 5% overvalued.
The Reserve Bank of Australia eased monetary policy at its May and August meetings to its current level of 1.5%, which it judges to be consistent with sustainable growth in the Australian economy and achieving its inflation target over time.
Unemployment and Wages growth
The unemployment rate has been little changed at around 5.8% over 2016 and employment growth has been steady at around 2 per cent in year-ended terms. Strong growth in part-time employment has been apparent in most states, while full-time employment has fallen in the mining-exposed states. Forward-looking indicators have been consistent with only a slight change in the unemployment rate in coming months. Domestic cost pressures, including wage growth, have remained low and are expected to remain so for some time.
One of the more interesting measures of consumer confidence shows the effect politics has on consumer confidence levels. Political uncertainty and perceived harsh budgets, in particular, can cause material changes in consumer confidence levels, which in turn can influence a consumers propensity to spend on discretionary items.
In conclusion, we believe the outlook for the retailing sector during the all-important Christmas and New Year shopping period looks positive as the reigning benign macroeconomic conditions should underpin consumer confidence levels.
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