By Cornelius Zeeman and Seipati Rakgoale,
Fairtree Portfolio Manager and Equity Analyst
The United States has managed to avoid a recession thus far, but a slowdown in economic activity is still expected. Current macroeconomic data provides mixed signals: real wages are growing, unemployment remains low, but inflation remains sticky and credit scores are deteriorating.
Wage growth.
Real wage growth has been particularly strong for lower-income cohorts, which has fueled discretionary spending over the past two years.
Graph 1: Real wages indexed
Source: Morgan Stanley
Credit delinquencies.
Consumer credit data shows a consumer under pressure, especially when looking at credit cards and auto loans. COVID-relief cheques assisted struggling consumers in paying down debt. It also allowed subprime borrowers to qualify for credit they otherwise might not have. Mortgages are mostly fixed rates, so the higher interest rates have not taken their toll on those consumers.
Graph 2: Transitions to serious delinquency
Source: Morgan Stanley
Retailers’ exposure.
In a tight economic environment, lower-income consumers are most impacted, making it crucial to assess which retailers are most exposed to these income brackets. Discount retailers, such as Dollar General and Dollar Tree, as well as aftermarket automotive parts retailers, like AutoZone and O’Reilly, look the most vulnerable.
Graph 3: Retail consumer exposure by household income bracket
Source: Morgan Stanley
Policymakers and businesses alike must be prepared to navigate the evolving economic environment, especially as a slowdown may impact consumer spending and retailer performance. Adapting to these changes could be key to maintaining economic resilience and supporting consumers through uncertain times.
Disclaimer:
Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices, fees, brochures, minimum disclosure documents and application forms, please go to www.fairtree.com
