What floats atop oil puddle?
Shares in consumer discretionary stocks have rallied this year, with the fall in the oil price boosting consumers’ disposable income. However, in a market that already looks pricey, gains may be limited. Stephen Gunnion takes a look
Oil’s fall from $115 a barrel last June to below $50 a barrel in January has been nothing short of spectacular — spectacularly bad for economies and companies that build their fortunes on the price of the slick, black hydrocarbon and spectacularly good for economies that rely on imports to fuel their economy and for the consumer-facing companies that are likely to be beneficiaries of the cash that motorists will be saving at the petrol pumps.
Numbers being thrown around indicate that US consumers saved $14bn on motor fuel last year. The AAA, the US’s largest motoring group, estimates they could save between $50bn and $75bn this year. In South Africa, the figures are far more modest. Local motorists spent R106bn on fuel last year, says Johann Els, senior economist at Old Mutual Investment Group. The petrol price drop will mean a saving of about R20bn, or about 1% of total consumer spending, he says. Mike Schüssler of Economists.co.za estimates the average motorist will have saved R580 a month from the cumulative cuts since August.
Lower fuel prices contribute to a lower rate of inflation, giving the Reserve Bank breathing space before the next interest rate increase. The consumer price index decelerated to 5.3% in December and Els now expects it to average 3,8% this year, from 6,1% in 2014.
“We are unlikely to see interest rate hikes during the course of 2015 as it will be difficult for the central bank to justify an increase, especially when inflation is below 4% for a larger part of the year,” says Els.
Investors wanting to take advantage of the more benign outlook for South African consumers may be too late, however. Investec Asset Management portfolio manager Rhynhardt Roodt says in some cases the benefits of cheap energy have already been priced into stocks. Retailers, an obvious beneficiary, rallied strongly early in the year, with some shares up as much as 20%.
“The horse has bolted,” he says. “While it’s still an environment where growth is fairly pedestrian, the move you have seen is things getting slightly better at the margin.”
Among the retailers, gains have been widespread since January 1. At the time of writing, the FTSE/JSE Food & Drug Retailers Index was up 7%, putting it on a PE multiple of 25,6, while the FTSE/JSE General Retailers Index was up 14% to reach a PE of 21,9. Year to date, Clicks climbed 9%, while Mr Price also gained 9%, Woolworths