Summary: The impending arrival of Amazon is just the beginning of the changes set to take place across the economy, and the Millennials Generation will be the key drivers because of their different lifestyle preferences. Meanwhile, a legal case involving three Federal Ministers could have big market implications.
Key take-out: Investors should be keeping their eye on companies that are able to provide experiences, not just products. It’s here that Millennials are focussed.
In the last week the market has become very nervous about the looming presence of Amazon in Australia. I want to add a risk that the market does not have on its horizon—an early election. More on that later.
There are two reasons why Amazon is coming to Australia. The first is the obvious one. Australian shoppers have a far lower online take up than their counterparts in the US and Europe, and that is because Australian retailers have not matched the online offerings of their counterparts overseas. That is going to change, and consequently you can see the nervousness in the share market.
But there is a second and even more important reason why Amazon is coming to Australia.
I suspect that, in the longer term, this second reason is going to become a key force in determining long-term investment strategies over a wide range of areas – not just online retailing.
Australia has one of the world’s biggest congregations of Millennials and, according to Macquarie, by 2030 this group of people will earn two of every three dollars of income generated in Australia and their spending power will rise to $853 billion. The patterns of that spending are going to have a big influence on where growth is generated in the economy.
It almost goes without saying that our Millennials’ driven economy will be comprised of the smart phone generation that does a great deal of its shopping online via the phone, and uses personal recommendations and social media to source information.
It is the companies that tap this Millennials market that will be the winners, and those that miss out will need to focus their attention on the older age groups. The first thing you notice when you talk to younger people is that they think differently to both my generation and those of my children. They are far less interested in physical possessions, and I think their parents and grandparents have contributed to this by making housing unaffordable and therefore forcing a totally different way of living in the next generation.
Unlike their parents and grandparents, they do not have the same store of value in physical goods. They are far less likely to be interested in a car or television set, but are much more interested in experiences. That is going to make it very hard for physical goods retailers like JB Hi-Fi and Harvey Norman to perform well. I reckon there is a good chance JB overpaid for the Good Guys.
Conventional retailers will struggle, unless they realise that they have to provide an experience not just the transferring of physical goods. And so, in the retail sector, I think we will see some local winners emerge, but they will be winners that understand this new generation.
Unfortunately, at this stage, I don’t think we have any retailers that have cottoned on to the change. But clearly groups like airlines and holiday resorts that are selling experiences are going to do well in the new environment. And, surprisingly, luxury goods groups that target an experience with their products aimed at younger people also may do well.
Millennials will not be directing money towards houses, so home ownership will continue to decline unless it is made much more affordable. That means banks are not going to experience volume growth of home lending to home occupiers. The growth will be in investors. And the investors in buying houses will need to target these younger groups. Be careful about sending rents too high – tenants will move elsewhere.
Millennials and mobility
In the workplace, at least in my generation, the first objective was to get the best salary that we could. For the Millennials this is very much secondary to personal experience and, in particular, they are looking for flexible work.
Far more of their activities will be via some form of contract, where they perform a task or so-called gig. That will make for a much more mobile workforce, because they will not have a house and long-term career to anchor them to a particular geography.
At the moment the most popular places are the inner-city, because for inner city-living they don’t need a car and are able to choose from a large number of jobs. That will not change.
But I think we will see a greater emphasis on regional centres where housing is cheaper and Millennials have a lifestyle that they can enjoy. That may include outers suburbs, but only if they offer a lifestyle and do not harbour crime and other difficulties. As you can see, this new world turns the many conventional investment theories on their heads.
The environment will be very important and companies operating in oil, gas and coal will not be popular investment destinations. We will see a rise in investment funds that specialise in stocks that they believe are environmentally sound and have a sustainable operation.
Of course, Australia gets much of its wealth from minerals, especially iron ore, coal and LNG – a strange paradox, particularly as the Millennials will be living in areas of the country well away from the areas that generate the wealth from minerals.
The next few years will see a rapid rise in the growth of companies that specialise in the Millennials and other specialised markets.
For example, in the food business over the last few decades, small food producers have been squeezed out by the large supermarkets because, unless you were number one or two (occasionally number three), you couldn’t get shelf space. But Amazon is going to open the way for new food enterprises to market to the up-and-coming generations in a way supermarkets have not done.
So, don’t be surprised to see new investment opportunities in this area. Groups like A2 Milk have understood the market, but there will be a lot more. I think it is going to be a very exciting time and very different to anything people in my generation have ever experienced.
A legal case with big market consequences
Meanwhile, to today’s hidden issue. I have rarely seen the legal community so totally enthralled by a legal issue as we are seeing in the case of three Federal Ministers for alleged contempt.
Without in any way speculating on the outcome of the court case, the legal community is acutely aware that the three Ministers’ case has the theoretical potential to trigger an election. No one can recall a similar situation in our history.
In total contrast to the legal community, the share market is responding very calmly to the risk that three Ministers of the Crown could be sentenced to a jail sentence of more than one year. I emphasise that in no way am I forecasting any decision. The courts will make the decisions.
But theoretically, if that happened, the Ministers would be ineligible to sit in the Parliament and the Government would lose its majority and there would be an election.
According to the opinion polls, the Turnbull Government is highly likely to lose any election held in the near term and, accordingly, Bill Shorten would be the next Prime Minister.
The prospect of such a change in government is likely to send the markets down sharply. I emphasise that is not a forecast, just a risk.