All the ingredients for a consumer boom are appearing, experts say, as turbulence in Asia keeps commodity prices and inflation down.
Oil prices remain low amid global oversupply and market worries about slowing demand in China. Meanwhile, Beijing’s devaluation of the yuan means lower inflation – in the form of cheaper goods from China – is being exported around the world.
The US consumer will be the chief beneficiary of this, and now investment managers are buying up consumer stocks in anticipation of greater spending. “Falling commodity prices have contributed to falling inflation, rising real incomes and improving consumer confidence. This has all the ingredients for a consumer boom,” says Rebecca O’Keeffe of Interactive Investor.
THE BIGGER PICTURE
After a summer of sell-offs in equity markets, investors are returning to autumn markets looking for pockets of opportunity.
While a debate rages over which stocks are now cheap, some experts believe the market is failing to appreciate the bigger picture. “The sentiment has been very focused on the negative, investors haven’t looked at the wider impact that lower energy prices will have on households. Cheaper energy effectively gives a significant boost to disposable income,” explains Adrian Lowcock of Axa Wealth.”
Some high-profile indices illustrating consumer confidence and retail sales have not been as strong as they were earlier in the year – but the overall trend is positive. Moreover, low energy prices take a while to feed through into falling costs at the petrol pump and lower heating bills.
“The US consumer is... beginning to benefit from lower energy costs. They are talking about gas prices falling from $1.75 - $1.50 per gallon by the end of the year,” says Diane Sobin of Columbia Threadneedle Investments. She adds that headline indices do not capture other measures of consumer confidence, such as hotel bookings and restaurant reservations. All of these illustrate a growing willingness to spend.
“Underneath it all is growing consumer confidence, and that is what ultimately drives the US stock market... The medium to longer-term impact of falling energy prices should not be ignored,” Lowcock says. He highlights Threadneedle European Select and the Schroder US Mid Cap fund as two which could capture gains in consumer stocks.
Sobin highlights stocks such as Walmart, Home Depot and Southwest Airlines as ones which may benefit from this trend.
BAD NEWS FOR HOMEOWNERS
One hindrance to the positive outlook for the consumer is interest rate rises. When rates go up in the US and then the UK, as they are expected in the next six months, mortgage repayment costs will increase. This will potentially put a dampener on consumer spending.
However, nearly 70 per cent of homeowners in the US are on fixed-rate multi-decade mortgages, with only around 30 per cent on variable rate. This reduces the sensitivity of the US consumer to central bank rate rises, Lowcock explains. The average UK homeowner is more exposed to rising rates, as 70 per cent of mortgages are variable rate and tend to be fixed at periods of less than five years.
Another dampener is the fact that shares of many consumer-focused multinationals are being punished because of their presence in weaker economies. Companies focused on the domestic US consumer should do better. “Gains are still possible, particularly in domestically orientated stocks which are more insulated from the problems elsewhere in the world and would benefit from a strong consumer,” says Juliet Schooling-Latter of FundCalibre.