The companies set to win big from Black Friday and interest rate cuts

Retailers are set to profit big from declining interest rates, increased spending during Black Friday, and elevated household disposable income. 

Other sectors are poised to benefit from the second-round effects of these trends, with property well-positioned and banks set to gain. 

This is feedback from the portfolio manager at Foord Asset Management, Wim Murray, who recently outlined which companies the asset manager finds attractive in the current environment. 

Murray said that as the holiday season approaches, investors are turning their attention to Black Friday and consumer spending trends.  

With declining interest rates, South African consumers are set to benefit from relief in their wallets.  

The lower rates, alongside the introduction of the two-pot system and the resulting cash windfall, as key factors supporting disposable income and consumer spending. 

However, he cautions that, despite the short-term tailwinds, careful stock selection remains essential as there will be clear winners.

While South Africa’s retail sector has struggled recently, new data from Capital Connect and the Bureau of Market Research points to a positive near-term outlook, especially with strong Black Friday sales forecasts. 

The data suggests that consumer spending during Black Friday could inject R88 billion into the South African economy this November.

Murray said Foord prefers high-quality, defensive stocks within the sector. Woolworths, in particular, stands out as an attractive investment. 

The company’s share price is appealing, and while its Food and Clothing SA division is fairly valued, the market has overlooked the struggling Country Road brand. 

Murray emphasised the strength of Woolworths’ underlying assets, particularly its Food division, which generates high returns on capital and has clear growth potential. 

These South African businesses are well-positioned to benefit from consumer tailwinds, while investors also gain optionality from any potential turnaround at Country Road.

Property stocks are also poised to benefit from increased consumer spending and potential rate cuts. Higher foot traffic in malls will benefit landlords with turnover-based leases, while lower interest rates will reduce financing costs, boost distributable income, and improve valuations by lowering capitalisation rates.

Banks, too, stand to gain from the two-pot system and rate cuts, both of which should improve consumer affordability and reduce bad debt. 

However, a key risk for the sector is the negative endowment effect, as lower rates on deposits may compress banks’ net interest margins. 

Murray favours high-quality players with strong management teams. A conservative lending strategy focused on high-quality clients are crucial for Foord.

Looking towards the festive season and the anticipated increase in tourists visiting South Africa, local hotel groups are set to benefit. 

Allan Gray portfolio manager, Varshan Maharaj, recently explained which companies he sees as capitalising on increased travel to and within South Africa. 

Maharaj highlighted that as the festive season approaches, record tourist numbers are anticipated at popular destinations like Cape Town and Durban.

He noted that the tourism industry’s post-pandemic recovery is evident in a 50% increase in international arrivals last year.

According to Maharaj, this recovery signals promising prospects for the hospitality sector, which remains undervalued and offers long-term growth potential for investors.

“With guest numbers improving after the devastation of COVID-19, now is an opportune moment for investors to revisit the hospitality sector,” he said.

“The two key factors for successful investment are the price you pay and the value derived from earnings growth. Currently, the hospitality sector provides compelling opportunities on both fronts.”

Maharaj pointed out that local hotel chains Southern Sun and City Lodge are well-positioned to capitalize on the uptick in tourism.

“Both companies operate and manage their hotel portfolios. Their profitability hinges on the number of available rooms, occupancy rates, and average room rates (ARRs),” he explained.

Southern Sun’s ARR for this year stands at R1,388 (approximately $74), significantly lower than the $120 to $150 ARRs typical in comparable markets.

He attributed South Africa’s lower ARRs to an oversupply of rooms but suggested that rising occupancy levels could drive profit growth over time.

That said, Maharaj cautioned that increased occupancies and ARRs are contingent on broader economic growth, which may take several years to materialize.

“Hotels are cyclical by nature, but we believe the sector has some strong years ahead,” he added.

Despite a recovery in earnings, the share prices of these companies remain under pressure, offering a favorable entry point for investors seeking value.