ASX 200 retail stocks: where next in 2024?

ASX 200 retail stocks, by and large, enjoyed a strong 2023.

For context, the S&P/ASX 200 Retailing index (XRTJD) has risen by 17.3% over the past year, and the largest names in Australian retailing have done correspondingly well. Wesfarmers' shares are up by 18.1% over the past year, JB Hi-Fi by 27.1%, and Harvey Norman is flat but has risen sharply since June.

Where next for the ASX 200 retailers?

To start with, the most recent monthly retail trade figures look promising. Australians spent 2% more in November than in December in ‘seasonally adjusted terms’ — that is, even accounting for increased Christmas spending. However, even this is arguably due to the import of Black Friday sales; in pre-pandemic times, Australia used to spend circa 8% more on non-food items in November than October, but this rose to 17% in 2023.

This matters because retail is dependent on discretionary income — and discretionary income is at least partially reliant on interest rates. The Reserve Bank of Australia (RBA) uses retail spending as one of its yardsticks for consumer demand, and increased spending runs the risk of fueling further inflation.

For context, CPI inflation fell to 4.3% in November, its lowest reading since January 2022 — following similarly positive movement in the UK and the US. But this is still above the 2-3% official target. And as the RBA was reluctant to start hiking compared to other economies, and given that its cycle lags other countries, the central bank could also take longer to start cutting rates.

For perspective, the RBA increased the cash rate to 4.35% in November — the highest in 12 years, having increased the rate by 425 basis points since 2022. Analysts had predicted a year ago that the cash rate would peak at 3.6%; and now bond traders are implying no further rate hikes with two reductions in 2024 starting in June.

It’s worth noting that Australian GDP barely rose in Q3 2023, while the unemployment rate rose to an 18-month high of 3.9% in November. Significant jobless increases could see the RBA start cutting sooner or deeper — while an economic black swan could also change the narrative.

ASX 200: tax cuts

While 2023 was a year of inflationary pressures and a cost-of-living crisis, 2024 could be another good year for the retailers given the coming stage-three tax cuts. These will reduce tax revenue by $320 billion over the next decade —and treasurer Jim Chalmers is insisting there will be no change to current plans.

Passed in mid-2019, the cuts will begin in July 2024 — removing the $120,000 to $180,000 tax bracket, increasing the top tax bracket to $200,000, and reducing the marginal rate for earners between $45,000 and $200,000 to 30%.

Regardless of the politics, the bottom line is that Australian consumers are going into a year where analysts expect inflation to fall further and the cash rate to start being cut — while taxes are also cut sharply. Much of this extra cash in the consumer pocket will arguably end up in the tills of ASX 200 retail firms.

This positive momentum is perhaps reflected in Super Retail Group. The stock reached an all-time high of $16.91 on Monday after reporting first-half year results where the Supercheap Auto and Rebel owner's unaudited revenue came in at a record $2 billion.

CEO Anthony Heraghty enthuses that ‘the Group has traded well over the cyber sales and Christmas holiday trading period. We maintained positive like-for-like sales growth in the first half… our customer proposition and the resilience of the lifestyle and leisure categories in which we operate underpin our performance in challenging economic conditions.’

This may be just the start.

Past performance is not an indicator of future returns.

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