In our latest quarterly reports we noted a nice lift in sentiment measures, both for overall consumer sentiment and for sentiment within the retail sector.
Whether these lifts are sustained remains to be seen, and there are a couple of risks which could hamper future rises. In particular, the volatility in global markets can have impacts on short-term consumer psychology.
The wealth effect is an important component in the current 'recovery' from the global credit crunch. (Yes, we will keep putting the word recovery in quotation marks until further notice... or until we don't have to refer to it at all, such as when the US Fed starts discussing even just the possibility of negative rates). When people see asset prices rising, they tend to feel wealthier and spending changes as a result. People do more shopping in bull markets.
There are some businesses that will not get the full gains of wealth effect spending however, such as low-cost stores and fast-food outlets. When people feel wealthier they'll go for higher priced options than they otherwise would have.
There's some argument over the relative contribution that various asset classes make to the wealth effect. Some say stock market prices don't matter, some say equities bubbles are intentionally pumped up specifically for the wealth effect. Some say home prices are the most important factor.
(Rising residential property values in the early-mid 2000s saw US homeowners borrowing against equity in their homes and spending this cash. We know how that ended and obviously people are better off not treating their primary residence as an ATM).
So whilst consumer confidence is up right now and retail sector conditions are positive too, it is worth keeping an eye on the ASX and overseas markets. The balance sheets of big-4 banks and home prices matter too. There are lots of reasons not to expect either a great year for equities or boom-level gains in home values. This would impact consumer psychology, even amongst people who are not invested in the stock market and who do not own property.
The general vibe matters.
Whilst some of this post may have come across as a little glass-half-empty, don't worry.
We're still optimistic about the local economy in general and think retail will be ok.
Our fundamentals and supporting demographics here in Australia are quite good. If you want to know more about either and how you can take advantage of these - drop us a line.