The Consumer Paradox

The Australian consumer was dormant for years heading into 2020, with muted growth blamed on low confidence and a lack of wage growth. Many posed the question: “What would it take to boost consumption?”

21 Sep 2020

The answer, it turns out, was a pandemic. While COVID-19 has brought about a raft of surprises, mostly negative, the Australian consumer has been a positive one – actually spending more since the pandemic began. In the midst of a health crisis and with the economy on a precipice, retail sales grew $2bn in June compared to February1.

Of course, it is the fiscal policy response to the crisis which has triggered the splurge. JobKeeper, JobSeeker, tax support, early redemptions from super (ERS) and loan relief have increased household cash flows by +6% ($19bn) year-on-year between March and July2.

The hope from all this support was to avoid a sharp fall in spending – not to jolt awake the Australian consumer. After all, 22% of consumption categories (by value) were either shut down or dormant, including hospitality, surgeries and travel2.

Consumers have instead turned to online shopping (a distinctive advantage in the current environment), where sales have surged +40%. Clear category winners in retail (in the four months to June) were1:

  • Supermarket sales (+8%, or +$762mn)
  • Liquor sales (+38%, or +$391mn)
  • Furniture sales (+20%, or +$240mn)
  • Electrical goods (+21%, or +$368mn)
  • Hardware (+28%, or +$460mn)
  • Sporting goods (+38%, or +$157mn)

It is clear the consumer ‘followed the cash flow’ and spent accordingly, with little regard to its source or sustainability. In fact, consumer confidence acted predictably with the index falling from 95.5 in February to a recession like reading of 79.5 in August3, however consumer actions/expenditure clearly decoupled from confidence.

Just as COVID will eventually pass (you might say wishful thinking) so too will this consumption spike. By mid-2021 it will get harder as fiscal measures fade, ERS ends and loan deferral programs are withdrawn. A more cautious consumer is likely to emerge and the rising tide which has lifted most listed retailers (the sector is up +16% YTD, +70% from the March low) will become more selective.

We therefore want to be highly selective and focus on owning the quality companies which are well positioned online, are in growing categories and have strong competitive positions, with prime examples in our portfolios being JB Hi-Fi (on a local scale) and Aristocrat (on a global scale).

Retail sales - COVID-19 winners

Source: Yarra Capital Management, Australian Bureau of Statistics.

More Equities articles

Disclaimer

This website is intended for persons resident in Australia only and should not be relied upon by persons from any other jurisdiction. UBS Asset Management (Australia) Ltd ABN 31 003 146 290, AFS Licence No. 222605 is the product issuer of investment funds listed on this website. Before making an investment decision, you need to consider whether this information is appropriate to your objectives, financial situation or needs. Any potential investor should consider the relevant product disclosure statement (PDS) in deciding whether to acquire, or continue to hold units in a fund. Please consult your financial adviser. Past performance is not a reliable indicator of future performance.

Offer not to persons outside Australia

The PDS does not constitute an offer or invitation in any jurisdiction other than in Australia. Applications from outside Australia will not be accepted through the PDS. The funds are not intended to be sold to US Persons as defined under Regulation S of the US federal securities laws.

Read more about our privacy policy and UBS AM Principles of Internal Governance and Asset Stewardship

© UBS 1998 - 2020. All rights reserved