Nuance in the Retail Market: Is the Aussie Consumer Really in Trouble?

US stocks sold off overnight. The Dow fell 1.5%, while the S&P 500 and the NASDAQ dropped 1.2%. Gold rallied back above US$1,500 an ounce.

Worryingly, the US 10-year bond yield fell sharply, to 1.64%. That’s its lowest level since October 2016. In other words, the bond market is telling you the US economy is slowing down. And now the equity market is finally starting to agree.

In Australia, the 10-year government bond yield recently fell below 1%. This is why the RBA is so keen to keep cutting official interest rates.

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It’s trying to avoid a ‘yield inversion’. This is where long-term rates fall below short-term rates, a sign that the market thinks the economy is going into recession.

But central bankers are smarter than everyone else. So they lower the cash rate, to the point of insanity, to avoid recession. The central bankers think they have won. But the nature of the market cannot be easily outsmarted. It has patience beyond the average central bankers’ tenure.

I’ll leave the central bank bashing for another day. There will be plenty of opportunities.

Today, I want to show you how there’s plenty of room for nuance in this market. Just because everything is screwed up, doesn’t mean everything is screwed up, if you know what I mean.

For example, a few weeks ago, department store retailer David Jones came out with another asset value write-down. South African business Woolworths purchased the retailer for $2.2 billion in 2014. It now carries the value of David Jones on its books for $984 million.

The consumer is in all sorts of trouble right? Stay away from retailers!

But then you get a result like the one JB Hi Fi Ltd [ASX:JBH] delivered yesterday. Net profit increased a better than expected 7.1%. Revenues increased 3.2% and the full year dividend increased 7.6% too.

As a result, the share price rallied 7%. It’s now just a few cents shy of its all-time high reached in 2016.

I thought the consumer was dead?

That is where you have to be careful about extrapolating trends, or succumbing to confirmation bias. If you can look at data objectively, and not draw conclusions that simply are not there, you can make some money in this market, despite the economy having plenty of headwinds.

For example, JBH is one of the best, if not the best, retailer in the country. Department stores, on the other hand, are structurally challenged businesses. Just because David Jones is struggling, it doesn’t mean the whole sector is in trouble.

However, if JBH was in trouble, then you should be concerned about the whole sector. But it’s not. It’s doing well.


It all comes down to interest rates.

For example, look at the chart below. It shows JBH from 2009 to early 2012. Not coincidentally, rising interest rates during this time had an impact on the business.

JB Hi-Fi Ltd - JBH (ASX) - 1 Day Bar Chart - AUD - 13-08-19

Source: Optuma

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With interest rates falling again in 2019, and tax cuts in the pipeline, sound retailers with good product offerings will do well. That’s why JBH is back up to all-time highs.

Harvey Norman Holdings Ltd [ASX:HVN] is another candidate. It’s a stock I have in my Crisis & Opportunity portfolio. As you can see in the chart below, interest rates have provided a solid boost to the stock this year.

Harvey Norman Holdings Ltd - HVN (ASX) - 13-08-19

Source: Optuma

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The fact that both of these retailers are, at least in part, tied to the housing cycle, provides an additional boost.

The Australian housing market has turned. The worst is over. That’s helping demand and sentiment towards these stocks too.

How do I know the housing market has turned?

The evidence is in stock prices everywhere. But I’ll just show you one. Yesterday, the share price of online real estate advertiser REA Group Ltd [ASX:REA] broke out to a new all-time high. That tells you volumes are picking up.

REA Group Ltd - REA (ASX) - 1 Day Bar Chart - AUD - 13-08-19

Source: Optuma

[Click to open in a new window]

And the on the ground intel I’m getting tells me that buyers are back. You’ll hear more about this from me in the weeks ahead.

That aside, the point I’m trying to make here is that you shouldn’t lump all retailers in together. Department stores are no longer the bellwether stocks for the sector. They haven’t been for a long time.

But narratives can be seductive. If you have a bearish bias, it’s easy to latch onto a poor result from a household name like David Jones and just assume the conditions are the same for everyone.

But good investors understand there is nuance in the market. What’s affecting one company in the sector may not impact others in the same way.

That’s why I always consult the charts. They help to put your view into a non-biased perspective.

And right now, the charts of JBH and HVN are telling you the consumer is not as bad as you might think.


Greg Canavan,
Editor, The Rum Rebellion

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Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own.

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