The Aus retail sales data is looking as healthy as you’d expect, given lockdowns…
…falling 1.7% mom, and -0.7% yoy.
That is weak enough to bring us back below the trend rate of growth, established over the past decade. Whilst that’s bad, there’s little in this that’s new news. The only question was how bad it would be, and, to that end, it was actually slightly better than had been expected.
Ordinarily, a beat, coupled with the positive news about the October reopening, would be supportive to discretionary retail.
However, to our mind, the majority of discretionary retail stocks have overcapitalised pandemic related earnings boosts into perpetuity. Those gains will absolutely normalise, as the share of wallet returns to a more traditional, diversified mix of expenditures, in which services (i.e. not goods, not coffee machines or tow-bulls) play a much more prominent role.
As such, across our direct equity portfolios, we hold no consumer discretionary stocks, with the exception of G8 Education (GEM), which we think is somewhat mislabelled (childcare is not a discretionary choice) and is, we think, a solid reopening play.
The same points apply the defensive food retailers. We’ve trimmed our Coles (COL) exposures modestly, locking in profits, and moving slightly underweight staples, on valuation grounds, and the above points about share of wallet normalisation.
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