A $133 Billion Fund Says Australia Consumer Stocks Bottomed

(Bloomberg) --

Australia’s ability to quash the coronavirus spread and begin easing restrictions means stocks catering to the needs of consumers have likely already hit their nadir, according to AMP Capital Investors Ltd.

“They are getting some boost from the reopening of the economy and the fact that consumer sentiment has improved,” said Shane Oliver, head of investment strategy at the Australian firm, which oversees more than A$200 billion ($133 billion) in assets.

The call comes as the nation faces the possibility of its first recession in almost three decades, a potential trade war with China and volatile consumer confidence. A measure of sentiment sank the most in its 47-year history in April amid a lockdown that limited gatherings to as few as two people outside, before unveiling the steepest rebound in May as shops and malls began to reopen.

Oliver has one caveat -- no second wave of infections. Australia has so far managed to flatten the curve, with the nation of about 26 million not reporting more than 50 new cases over a 24-hour period since April 17, allowing it to ease some restrictions.

Stocks tied to discretionary spending, such as electronic and whitegoods retailers, will likely do better going forward than those in the staples sector, which got a boost in March amid panic buying during the early stages of the lockdown. Consumer-discretionary shares can give a return of around 10% over the next year, outperforming staples, Oliver said.

The S&P/ASX 200 Consumer Discretionary Index has risen 27% since the end of March, following a drop of a similar magnitude during that month as Australia’s benchmark index plunged into a bear market just 14 sessions after hitting a record high. The gauge for staples has climbed 1.7% over the same period, after retreating 4.4% in March, according to data compiled by Bloomberg.

The country’s shares climbed on Thursday after Reserve Bank of Australia Governor Philip Lowe said the economic downturn may not be as “severe as earlier thought” as the nation’s health outcomes were “better than earlier feared.”

Analysts at Macquarie Group Ltd.’s wealth-management unit and fund managers at T. Rowe Price Group Inc. are also positive on some consumer equities, citing a potential economic recovery and a slow return to a more normal way of life.

V-Shape, U-Shape

The shape of Australia’s rebound is likely to influence the performance of the sector over the next few months, Macquarie analysts wrote in a note last week. A slower, U-shaped recovery, will likely favor staple stocks amid consumer caution, while a sharper, V-style revival is seen helping the discretionary side.

“Recent data and updates for discretionary ex. travel have generally been less bad than feared, and a slow recovery seems to be appearing sooner than expected,” the analysts wrote.

Top picks for an L or U-shaped economic rebound include Woolworths Group Ltd., Coles Group Ltd., Harvey Norman Holdings Ltd., Wesfarmers Ltd. and Domino’s Pizza Enterprises Ltd., while a V-shaped scenario is likely to support stocks including Treasury Wine Estates Ltd., Flight Centre Travel Group Ltd., JB Hi-Fi Ltd. and Coca-Cola Amatil Ltd., according to the note.

Randal Jenneke, head of Australian equities at T. Rowe Price, has a negative outlook on Australian consumption, but the sector is still his largest overweight as he holds “durable businesses with strong balance sheets.”

“What we continue to like in the space are companies exposed to Covid consumption trends such as ordering food in, home improvement and technology needs for working from home,” he said. His top picks in the sector include Aristocrat Leisure Ltd., Domino’s Pizza and IDP Education Ltd.

AMP’s Oliver said that while some market participants argue that self-isolation may drive consumers to rethink their spending needs, this is unlikely to last long “as people have short memories.”

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