Investors may find their Christmas stockings rather empty if the traditional year-end market rally fails to materialise due to weak consumer spending.
“I find it hard to see one of those broad-based rallies taking place due to uncertainty on the political and regulatory front,” Janus Henderson head of Australian equities Lee Mickelburough said.
“I don’t think its going to be a blockbuster Christmas, the consumer has been pulling its horns in.”
The Australian market traditionally ends the year with a bang, with 2017’s December advance for the S&P/ASX 200 Index adding up to 1.5 per cent, and the market rallying 4.4 per cent in December 2016.
“We usually have a Santa rally on light volumes and light news flow,” Airlie Funds Management portfolio manager Emma Goodsell said. “The Federal Reserve’s [anticipated] December interest rate hike and the OPEC meeting are putting December on the calendar in a way that it hasn’t really been before.”
Retailers often get increased interest at the end of the year if investors believe that shoppers are flocking to stores during the key Christmas period, when many retail operators earn a significant amount of their profits.
In 2016, the ASX 300 retail sector jumped 6.4 per cent in December and last year it rallied 2.5 per cent over the month.
Weak retail spending
While the retail sector gained last year, the advance was overshadowed by worries that the arrival of online shopping giant Amazon would take customers away from the traditional bricks-and-mortar operators.
This year, the prospects are even bleaker, with fear that the banking royal commission’s dampening effect on property lending, coupled with an already-slowing housing market and stagnant wage growth, will keep cash-strapped consumers away from the shops.
“The stretched consumer is in a much worse position today. With house prices falling, people don’t feel wealthy and don’t have money to spend,” Tribeca fund manager Jun Bei Liu said.
“Retail is looking very weak this year. I think that there are a few factors that will delay Christmas for retailers,” Ms Liu noted, saying that supported her negative stance on the stock JB Hi-Fi.
The introduction of out-of-season promotional shopping events, such as ‘Singles Day’ and the post-Thanksgiving shopping event ‘Black Friday’ act to pull spending forward, she said.
The retail sector has already fallen significantly year-to-date and losses have accelerated into the year-end after several well-known discretionary retailers warned during October of a weak start to their financial year.
Ms Goodsell said that, broadly, the ASX trading at near two-year lows reflects a view in the market that house prices will move back to where they were two years ago.
That is a theme that goes beyond the retail sector and includes the banks and any sectors that depend on a healthy level of consumer spending to make a profit.
“We are looking at how tighter credit is playing out through the markets,” she said, with the first wave of pain for banks and retailers likely to be followed by similar pressure for consumer-focused companies.
Coupled with domestic concerns about tighter borrowing, trade war risk and Brexit are also keeping fund managers up at night and limiting the scope for a year-end rally by the ASX.
But those worries have had the effect of taking the market down to levels that are giving stockpickers more compelling entry prices.
Ms Goodsell said that she’s looking for retailers that have cash balances, dominant positions in their markets and a store rollout runway. She likes Premier Investments, for example.
Ms Liu noted that CSL has been sold off, but said that there’s so much demand for the firm’s products that she suspects it could produce a good first-half result.
Technology stocks appear to have “found a bit of a floor” after the recent market rout, she added.
For the market to rally broadly, the banks and miners will need to advance, fund managers agreed, and such a move is possible.
Banks have a fair bit of bad news priced in now, Mr Mickelburough said. “They are cheap from a valuation perspective although they still have issues such as sluggish loan growth.”
Miners are interesting as well: “There could be a bullish point where China stimulates more than people are expecting and the trade war [between the US and China] settles down.”
An easing of trade tensions between the world’s superpowers following the Group of 20 meeting this month could be a trigger for the market to rally more broadly, Ms Liu agreed.
“If there is some sort of a deal then you would expect to see the equity market rally,” she said.
There could even be some better news for the consumer, Mr Mickelburough pointed out. “One thing is that the oil price is coming off,” he said. Brent crude futures are down 53¢ at $62.07 a barrel; brent is down 28 per cent since the start of October.