SIMON BROWN: How healthy will 2024’s consumer be?
The theory is that inflation has peaked, rates will fall and consumer stocks will benefit. But there’s a world of potential upset between theory and reality
I’ve been doing the usual year-end presentations and thinking about the coming year in local and global markets. One point has me scratching my head — the health of the local consumer.
To set the scene: inflation is moderating and likely to remain in the 3%-6% target range, while the experts agree that interest rates have peaked and will start coming down. Good for the consumer, right? And hence good for consumer stocks?
But I have concerns. The local consumer has had three extreme years, starting with the lockdowns of 2020 when many lost income either partially or completely. Then we had high inflation and rapidly increasing interest rates. This has left the consumer balance sheet frayed, and repairing it won’t happen overnight.
So yes, things will be better, but how long before we see a robust consumer again? Probably not soon.
I suspect that consumers will give priority to catching up on debt arrears, especially on home loans, vehicle finance and school fees — assuming it got that bad.
I suspect that consumers will give priority to catching up on debt arrears, especially on home loans, vehicle finance and school fees — assuming it got that bad
So what does that mean for retailers, specifically the clothing companies? This is partly discretionary spend, but after three hard years maybe that shirt is now so tatty it needs replacing. But surely it would be foolish to bank on a mad rush to buy completely new wardrobes?
This, then, is my dilemma. Yes, consumers will be under less pressure, but they won’t be going wild.
DStv, for example, is not going to see a surge, but Spur and Famous Brands may see some increased traffic, and there might be some shopping at food retailers as we spoil ourselves.
We can expect better trading volumes for consumer-facing stocks. But how will that reflect in their profits?
Looking at the recent Mr Price and Pepkor results, a few things stand out. For Pepkor, debt is costing more (Mr Price has no debt) thanks to higher rates. But with rates coming down, some of that pain will ease.
Load-shedding costs are not going away and now we have port congestion, for which no sudden cure is likely. Flying in goods is not viable; ordering earlier to compensate for the port delays could work, but will tie up extra working capital.
In other words, retailers may benefit in some ways but will continue to feel pain in other areas.
The key is to remember the market looks forward; share prices are a reflection of expectations for the future. The shares of most local retailers suggest a bleak future, so there may be some opportunity.
But be cautious. All these assumptions could turn out to be wrong. Inflation risks have not completely disappeared, so rate cuts may be further away.
Lastly, if you are going to shop for consumer stocks, always buy the best. Don’t buy the beaten-down loser in the hope it will get things right, because if it doesn’t, the general tailwinds will prove icy.
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