Weekly Reports | Mar 10 2023
The weekly broker wrap: consumer spend, retail outlook, general insurers.
-Consumers appear unwilling to draw on excess savings
-Gap between retail category performance likely to widen over second half
-Outlook for insurers continues to be dictated by inflation, reinsurance and weather
By Danielle Austin
Excess household savings unlikely to drive continued consumer spending
Consumer spending in advanced economies faces a weak outlook, says Oxford Economics, which identified rate hikes, weak income growth, declining household wealth and a reluctance to draw excess savings as likely indicators of a spending decline.
While expecting consumer spending to prove more resilient than during the global financial crisis, Oxford Economics is predicting spending to flatline over 2023 after losing momentum through 2022 as a result of a number of economic shocks.
While over the last year consumers in the US have drawn on excess savings to continue to fund spending, there is limited evidence of this occurring in other major economies including Canada, France, Germany, Italy, Japan, and the United Kingdom. Further, scope for drawing on savings is narrowing in the US, while Oxford Economics expects weakened consumer confidence is unlikely to encourage consumers in these other economies to tap into savings now. With benefits from the reopening of economies appearing to be largely played out, Oxford Economics highlights current trends, such as subdued spend on consumer facing services, could prove a permanent change.
Oxford Economics predicts a modest recovery from these economies from 2024. In Australia, consumption in the fourth quarter of 2022 was similar to that of the United States, around 6-8% above pre-covid levels.
Food and travel continue to be the safe pick among retailers
Jarden anticipates the second half to paint a clear picture of winners and losers in the retail segment, as headwinds build.
The broker finds the trading environment to be uncertain with 15% growth in January quickly moderating in February to see many categories turn negative. Food and travel remain the most resilient to this trend, with Jarden finding the strongest updates to be from Coles Group ((COL)), Woolworths Group ((WOW)) and Super Retail Group ((SUL)).
Commentary from retailers suggests the market is entering a normal trading period, with online having normalised, freight costs down, migration up, and promotions set to return. The broker warns cost headwinds, particularly related to energy and labour, do remain.
UBS echoed these sentiments, expecting category performance to be differentiated. While acknowledging staple food retailers, notably Coles and Woolworths, have benefited from inflation tailwinds, it expects food inflation to moderate over the fiscal year and a product shift toward lower gross profit private label goods to continue. The broker expects Aldi will be subject to potential share loss, which could prove a benefit to Coles and Woolworths.
Morgans anticipates a controlled descent in trading conditions in the second half, rather than a collapse, and continues to favour retailers with exposure to a younger customer, like Universal Store ((UNI)), Accent Group ((AX1)) and Lovisa Holdings ((LOV)).
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