This column has analysed several long-term trends in the past two years and the stocks to benefit. An ageing population, growth in middle-class Asian consumers and greater urbanisation and congestion are obvious trends. But it is surprising how investors can underestimate them.
Another trend identified in this column is the weakening Australian household sector. I have written about stocks such as debt collectors and advisers, rental groups and pawn brokers that benefit from tougher spending conditions – although not so tough that people cannot repay debt.
Slowing wages growth is another key trend this decade. It is one reason this column has, for the most part, avoided retailers and favoured other cyclical exposures such as housing-related stocks.
Sluggish retail sales growth, anaemic consumer sentiment and recent profit downgrades from prominent retail stocks confirm the challenges. Contrarians might see this as a buying opportunity: I see more small retailers being bought from receivers in coming years as a cyclical spending slowdown collides with structural change: people buying more goods online and changing spending habits.
Slower wages growth is a global phenomenon. Nineteen of 26 OECD countries reported declines in minimum hourly wages between 2011 and 2013, Macquarie Equities Research found. Wages on average fell 6 per cent in the major economies of the United States, Japan, the United Kingdom, Canada and Australia. Declining real wage rates are a huge headwind for retail sales.
Some might see this trend as temporary. Let’s hope so. But lacklustre growth and employment seems a more persistent trend this decade, given excess supply in so many industries. Anecdotally, one industry after another seems to be rationalising to cope with sluggish demand. Theories about “secular stagnation” – persistent poor growth and unemployment – are gaining traction.
So how can investors profit from a global trend of slowing wages growth? An obvious strategy is shorting discretionary retail stocks, even after recent share-price falls. A milder-than-expected winter could be a short-term problem for those more affected by weather, such as Kathmandu Holdings or Amalgamated Holdings, with its ski resorts.
Focusing more on consumer staple companies in the next 18 months might also pay off if investors tilt asset allocations more towards defensive rather than growth stocks as the US Federal Reserve starts to hike interest rates later in 2015.
The iShares Global Consumer Staples Exchange Traded Fund is up 16 per cent over one year to May 2014, and has good five-year performance.
Identifying winners from this trend at a stock level is harder. The trend of slowing wages growth, coupled with high property debt, should benefit some e-commerce companies as consumers look for savings through online buying.
iSelect has been on this column’s radar. It was one of last year’s most disappointing floats after raising $215 million in an Initial Public Offering in June 2013 at $1.85 a share. A surprise downgrade to prospectus revenue forecasts smashed iSelect. It trades at $1.14.
Make no mistake: iSelect is deeply out of favour, most brokers have hold or sell recommendations, and the market is rightly sceptical after it downgraded forecasts within months of listing – a sin for any IPO. It has plenty of work ahead to restore market confidence and should be considered a higher-risk idea for contrarian investors.
But iSelect also has high brand recognition and an interesting market position as consumers struggle with rising health, home and car insurance premiums, and gas and electricity bills. It’s not hard to imagine more consumers buying insurance, gas and electricity services online in coming years.
iSelect’s bigger push into electricity-rate comparisons is a smart move. It acquired General Brokerage Services, trading as Energy Watch, for $10 million in late May. Continued deregulation of State energy markets and energy-price fluctuations will force more consumers to look for savings. The acquisition is expected to be earnings-per-share accretive in FY15 and beyond.
The market will want to see a clean set of full-year accounts for iSelect in late August and confirmation that early hiccups are behind it. With a new CEO in Alex Stevens, who was buying iSelect shares this month, I expect better things for the out-of-favour internet stock, although there is no obvious catalyst to buy between now and the full-year result, and it would look more interesting below $1.
New Zealand buying site Trade Me Group also appeals at current prices. I wrote in May for The Bull: “Although Trade Me’s growth trajectory will slow in coming years, I cannot see too much wrong with its recent performance. It dominates the New Zealand online auctions and classified markets with about 3.4 million active user accounts – an asset that would be hard to replicate. About 650,000 people visit the site daily.”
This broader trend of slowing wages growth should encourage more people to buy heavily discounted new or second-hand goods online. I’m sure many reading this column have used eBay or other sites to sell or buy goods, out of convenience or to save money.
This column has also mentioned Asia-based e-commerce provider iBuy Group, which specialises in hugely discounted “flash sales” to clear excess inventory. It is not a play on slowing wages growth, but the trend of buying more goods online, and waiting for big discounts, just as those who shop in department stores wait for sales, has long-term appeal. As a recently established, loss-making micro-cap stock, iBuy is highly speculative.
– Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at June 18, 2014.
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