- Consumers continue to spend at a healthy pace. But will it last?
- Will consumer discretionary stocks get more love this year?
- Kim Parlee speaks to Jacky He, Global Consumer Discretionary Analyst, TD Asset Management, about the health of the consumer.
Inflation is running at multi-decade high levels in both Canada and the U.S. But despite rising prices, consumers on both sides of the border continue to spend. Kim Parlee speaks to Jacky He, Global Consumer Discretionary Analyst, TD Asset Management, about the health of the consumer.
Kim Parlee: As we all well know, inflation is running at multi-decade highs in both Canada and the United States. But despite the rising prices, consumers appear to be resilient. Will that continue? Jacky He is global consumer discretionary analyst at TD Asset Management, joins me now with his take on what he's seeing.
Jacky, it's great to have you with us. Why are we not seeing any kind of slowdown in consumer spending, with inflation roaring?
Jacky He: Hi, Kim. Thanks for having me, first of all. Yeah, so consumers are still spending, simply because they can. So we talk a lot about happenings like rolling stimulus, inflation, as you mentioned, higher gas prices. Yes, they are squeezing consumers' wallet. But if you look at the tailwinds, they are even stronger.
OK. So, number one, let's look at people got jobs. So in the US now, two job openings are now competing for one unemployed America. So people feel comfortable about their job security.
So, people get paid. They are getting paid more. So you look at wage growth. They are actually growing way above historical trend. So back in Q1, 70% of US firms already increased their wages. And then you look at consumers' bank accounts. You're going to find lots of excess savings sitting there. That can help consumers fund against inflation.
And last, but not least, consumers are wealthier than many people thought. They are under-leveraged. Their credit card balances is still low. And there are very few people missing interest payments. So overall, I'd say consumers are still in a very good shape.
Kim Parlee: I know you've got a chart here I want to bring up, where you take a look at the consumer balance sheet. When you talked about excess savings, this is a good-looking sheet, and it certainly shows -- or a good-looking balance sheet, I should say. And it shows that, yes, people do have-- are feeling healthier because of what they have in the bank.
Jacky He: Yes, Kim. I'm glad you find it good-looking before I even talk about this.
The thing is, US retail sales is highly correlated with household net worth. So people feel healthier, they tend to spend more. So what you find is this chart shows year-over-year growth of household assets versus their liabilities. Since global financial crisis, you find that that has been growing at a more contained pace and recently picking up because of higher mortgages. But you find the asset is growing even faster. So the difference between the two lines continue adding up to consumers' net worth.
And, also interesting, you'll find consumers today are fundamentally different from those back in 2000s. Back then, you see the mortgage outpaced the assets. Probably, my daughters can find a mortgage somewhere. But now those mortgages and loan growth, really driven by high-credit Americans. So that's a key difference.
Kim Parlee: Hmm. Interesting. I know that you take a look and you follow some of the consumer discretionaries. And I mean, the keyword there is discretionary. There's what we need, and there's what we want. So what is your outlook? Because, good numbers and good background, but again, as things change, maybe people don't feel like they need the discretionary as much.
Jacky He: 100%, Kim. That has been the least loved sector. And we do continue to anticipate a choppy year for this sector, not only because the investor will digest the headwinds and tailwinds we just talked about, but, also, this sector has a higher growth exposure to China, which we all know is, unfortunately, going through some difficult period of the lockdowns.
But the point is, China will reopen, sooner or later. And if you look at it from a longer-term perspective, this is a sector with lots of innovation going on. And they are able to outgrow the broader market in earnings over a long period of time. So volatility is not an enemy to us, at all.
So we find volatility is our friend because we'll pay particular attention to two types of companies, one, those who can really stand out to benefit from the consumption shift from goods to services. Think about those travel-related companies, hotels, et cetera. And number two, we'll look for the companies that are really high quality but got beaten up along with the others. I'm talking about companies with superior pricing power, sustainable cost advantages, and consistent capital returns, like dividends, and buybacks, and so on.
Kim Parlee: And I apologize for this Jacky, I've only got about 45 seconds. I know you have some names that you think are some good examples of the things that you're talking about. One of them, we'll just say, is Dollarama. Maybe just give us the pro and con, for this one that people need to think about.
Jacky He: Interesting. Dollarama does import quite a bit from China, but nothing has been impacted for their supply chain, largely on the fact that-- just because they have little exposure to Shanghai ports. What's interesting about Dollarama, it has sustainable cost advantages. You go to the shop. You find the products roughly 40% cheaper than Walmart or even Amazon. But at the same time, Dollarama is collecting a higher margin. So, against a persistent inflation, Dollarama's value proposition resonates really well with consumers.
Kim Parlee: Jacky, we're going to have to leave it there. Great example, though. And just remind people they got to do their own research. But good to have that example. Thanks so much for joining us.
Jacky He: Thank you very much, Kim.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
This article was written by
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