Aussie, Aussie, Aussie … Buy, Buy, Buy?
03 July, 2015
The "wealth effect" refers to the idea that consumers spend more when the value of their homes and share portfolios rise. This makes intuitive sense; wouldn't you be inclined to buy that new TV or upgrade your car if your house value had increased and your shares were showing strong gains?
Apparently not if you are Australian. House prices in major Australian cities have risen strongly over the past few years and show no sign of slowing, while the share market has been similarly buoyant. The majority of Australians own their homes, and many own shares, so they should be feeling wealthier and willing to spend; yet consumer spending remains decidedly tepid.
Australian consumers are clearly not confident. There are fewer secure jobs, and inflation, while relatively low, has outstripped wage growth leaving households feeling poorer.
Companies are feeling the pinch. Global fashion heavyweight Zara's Australian expansion is proving tough with profits contracting. Myer is closing stores in response to weaker demand. Even food retailers are struggling, with Metcash selling its profitable auto parts business to raise cash to support its ailing grocery operation.
Some consumer companies are proving their mettle and adapting to the change. Aldi, a food discounter, is rapidly expanding stores as Australians trade down to its cheaper house brands. Furniture retailer Nick Scali is modifying its products to keep them price competitive. Retail Food Group is shifting its donut and coffee stores away from increasingly empty malls to smaller shopping centres, which consumers are visiting more often as they reduce the size of their shopping baskets. In addition to introducing super-affordable offerings, Domino's Pizza is investing heavily in digital technology to drive sales volumes.
The great thing about confidence is that it can turn, and those companies that are using this challenging period to become stronger will be the clear winners when it does. Investment legend Warren Buffet advises investors to "be greedy when others are fearful"; we envisage a point when buying quality Australian consumer companies may be the perfect opportunity to do just that.