Companies in the consumer staples and resources sectors are poised to end the year on a positive note, according to Russel Chesler, head of investments and Capital Markets at VanEck.
But Mr Chesler has warned that a “perfect story is brewing” for companies in the consumer discretionary sector in the lead up to Christmas, given that VanEck continues to see one more rate hike from the Reserve Bank of Australia as being likely before year-end.
“Another rate rise, combined with still elevated inflation, will see consumers pull back further on non-essential spending. We think shoppers will shun big ticket appliance, TV and technology, purchases, instead, opting for Christmas mainstays of clothes, beauty items, and toys,” he said.
“As consumers manage higher interest rates and energy prices by reducing non-essential spending, the discretionary retail sector is set to suffer. We see companies such as Harvey Norman, JB Hi-Fi, and home furnishings companies such as Adairs coming under pressure.”
Consumer discretionary was the best performing S&P/ASX 200 sector in August, according to data from S&P Dow Jones Indices, with a rise of 5.74 per cent. As of the end of August, the sector was up 19.74 per cent year-to-date.
On the consumer staples sector, Mr Chesler anticipated that food and alcohol sales would remain strong as Australians prepare to celebrate the Christmas season.
“Coles and Woolies should continue to shine while alcohol retailers such as Endeavour Group and Treasury Wine should also receive a boost to their bottom lines as consumers charge their glasses and cheer in the New Year,” he predicted.
Turning to the resources sector, Mr Chesler stated that higher oil prices “should keep the share prices of energy companies Woodside and Santos elevated in the lead up to Christmas, while stronger iron ore prices are boosting the likes of Fortescue Metals, BHP, and Rio Tinto.
“The Australian resources sector seems to be proving relatively resilient despite weakened demand out of China,” he continued.
Additionally, Mr Chesler opined that A-REITs could be set to stage a comeback in the coming months, giving a number of developments that he identified as being positive for the sector.
“Australian inflation is at risk of remaining elevated over the medium term. Return of migration and the housing shortage are driving rental inflation,” he noted.
“Energy prices have increased and Australian dollar weakness adds inflationary pressures. The RBA is also likely to take a tempered approach to any future cash rate changes as it is conscious of the mortgage pain already inflicted on households as more roll off fixed rates.”
At present, VanEck favours office and retail REITs since both are trading at significant discounts to book value, according to Mr Chesler, who further suggested that macro indicators were pointing to the potential for upside fundamentals surprise.
However, despite this positive assessment of a number of key sectors, VanEck is of the view that markets will remain volatile over the short term.
“Following local and US markets’ recent moves upwards, there is a risk of a pullback before Christmas,” Mr Chesler added.
At the end of August, S&P Dow Jones Indices reported that the S&P/ASX 200 was up 6.74 year-to-date. Australia’s benchmark index was performing well ahead of the S&P/ASX Small Ordinaries (3.54 per cent) but slightly behind the S&P/ASX MidCap 50 (7.81 per cent).
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.