Rate cuts and Black Friday may spark festive cheer for consumer-oriented companies

As the holiday season approaches, investors are turning their attention to Black Friday and consumer spending trends. With Thursday’s Monetary Policy meeting expected to signal continued rate cuts, South African consumers are set to benefit from relief in their wallets. Wim Murray, Portfolio Manager at Foord Asset Management, sees these lower rates, alongside the introduction of the two-pot system and the resulting cash windfall, as key factors supporting disposable income and consumer spending. However, he cautions that, despite the short-term tailwinds, careful stock selection remains essential.

While South Africa’s retail sector has struggled recently, new data from Capital Connect and the Bureau of Market Research points to a positive near-term outlook, especially with strong Black Friday sales forecasts. The data suggests that consumer spending during Black Friday could inject R88 billion into the South African economy this November.

Foord Asset Management maintains a preference for high-quality, defensive stocks within the sector. Woolworths, in particular, stands out as an attractive investment. The company’s share price is appealing, and while its Food and Clothing SA division is fairly valued, the market has overlooked the struggling Country Road brand. Murray highlights the strength of Woolworths’ underlying assets, particularly its Food division, which generates high returns on capital and has clear growth potential. These SA businesses are well-positioned to benefit from consumer tailwinds, while investors also gain optionality from any potential turnaround at Country Road.

Property stocks, although secondary, are also poised to benefit from increased consumer spending and potential rate cuts. Higher foot traffic in malls will benefit landlords with turnover-based leases, while lower interest rates will reduce financing costs, boost distributable income, and improve valuations by lowering capitalization rates.

Banks, too, stand to gain from the two-pot system and rate cuts, both of which should improve consumer affordability and reduce bad debt. However, a key risk for the sector is the negative endowment effect, as lower rates on deposits may compress banks’ net interest margins. Murray advises a selective approach to banking stocks, favoring high-quality players with strong management teams. A conservative lending strategy, focused on high-quality clients, will be crucial for long-term success.

The easing of financial pressure on households and the potential boost from Black Friday sales offer some optimism for South Africa’s retail sector. However, caution is advised against relying too heavily on short-term tailwinds. Investors should focus on careful stock selection and long-term fundamentals, which ultimately drive company valuations.

*Wim Murray, Portfolio Manager at Foord Asset Management.