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Investors review retail sector as consumers hold cash

Investors review retail sector as consumers hold cash

Australians appear to be trusting in cash in the face of volatile global markets and political uncertainty, while consumer shopping habits continue their online evolution.

Australians are banking their cash as investment markets remain volatile in the lead-up to the UK's "Brexit" referendum on whether it should leave or remain a member of the European Union (EU).

Investors are remaining conservative, with banks seen as the best place for new savings at the moment, according to almost a third of the people responding to questions asked in the latest monthly consumer confidence research, conducted by Westpac and the Melbourne Institute.

Speculation about the result of the “Brexit” referendum in the UK on 23 June has unsettled markets overseas and locally in the past week, and the British pound has lost value against other major currencies.

If the UK votes to leave the EU, the process will drag on for more than two years and presents downside risk to global equity and commodity markets, with a likely “reassessment of the global economic growth outlook”, CommBank currency strategists said in a note.

A vote to leave the EU could result in GBP/USD falling initially up to 10%, while the AUD/USD could fall at least 2.5% and AUD/GBP could rise up to 8.3%, CommBank currency analysts forecast. The Australian dollar has traded between US72.57 cents and US74.71 cents so far this month and is sitting just below US74 cents at the time of writing.

Cash rates and central banks

Central banks and cash rates have also featured in global economic considerations this year, with the Reserve Bank of Australia dropping its cash rate to a record low 1.75% in May after surprisingly low inflation data and holding it at that level in June ahead of the federal election on 2 July.

The US Federal Reserve increased rates in December for the first time in a decade and indicated there were further increases to come this year. They made no change to rates at the Board’s Federal Open Market Committee meeting in June.

Concern about the slowing rate of economic growth in China and the country’s demand for commodities, including iron ore, Australia’s biggest export commodity, have prompted predictions of a downturn in the housing market in the world’s second-largest economy.

Economic performance

However, despite the global concerns, analysts including CommSec’s chief economist Craig James view the Australian economy as “performing well”.

And while consumers “favoured banks over any other destination [for their cash], including property, shares, paying off debt or spending it”, James said “finances are in good shape with debt being shunned and most ahead in their home loan repayments”.

“Conservatism reigns. Banks are not giving super-high returns but still they remain the preferred place for savings. No matter how far rates are cut, banks are still holding court for savers,” James said. “Consumers are feeling OK at present – not euphoric or pessimistic.”

Confident consumers can help to boost retailers, so the present environment might be sending mixed messages to those still keen to invest, either directly or through listed shares, in the retail property sector.

Changing habits

Traditionally, shopping centres have been the “go to” asset class for investors seeking low volatility and competitive total returns, according to a research paper by Chris Bedingfield, portfolio manager at global real estate investment manager Quay Global Investors.

But shoppers are changing their habits, with Australian businesses seeing income from internet sales jump 7% in the past year.

“While physical store presence remains critical, it is no longer the only channel for distribution," Bedingfield said. "The growth in online retailing can no longer be ignored, and while shopping centre owners have felt a small impact so far, this will increase as time goes on.” 

Technology is creating "disruption" in almost all industries, and traditional retailers are having to develop new strategies to boost sales and revenue and retain market share.

Big department stores are focusing on better customer service, streamlining the range of brands they offer and closing bricks-and-mortar stores as ecommerce builds momentum in Australia.

"Consumers can buy or consume goods and services wherever and whenever they want to," said CommSec’s James in a note. "For businesses, your competitors are no longer other local businesses. That’s because consumers can shop for rival goods and services across regions, states, nations and across the globe. 

"It doesn’t matter whether you are buying running shoes, booking hotel rooms or wanting to study at university, the options are global rather than local."

As a result, investors might need to review their approach to retail property to “ensure they remain exposed to the best opportunities”, Bedingfield said in the research paper.

Disruption brings change

“The short-term outlook for most shopping centre operators is likely to be ‘business as usual’," Bedingfield said. "But taking a five-year plus view, we believe that while the best shopping centres and malls will survive – and even thrive – many mid-level centres will close in the US. 

“The problems are less pronounced in Australia and Europe as there is a lower provision of retail floor space per capita.  However, these markets are not immune to technology and demographic headwinds.

“Retail landlords will need to have a greater focus on the luxury and ‘value’ retailers, and development will be more targeted.” 

Bedingfield forecast that "smaller shopping centres that meet local needs, focusing on groceries, services and pharmacy, will also continue to perform well”.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. The commentary provided from external companies that are not a member of the Commonwealth Bank of Australia Group of Companies (the CBA Group) does not represent an endorsement, recommendation, guarantee or advice in regard to any matter. Neither Commonwealth Securities Limited nor members of the CBA Group accept any liability for losses or damage arising from any reliance on external companies and their products, services and material. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.