ASX retail shares have endured the COVID-19 pandemic reasonably well.
As Australians received government support and spent less money on discretionary items like travel, supermarkets like Woolworths Group Ltd (ASX: WOW) cashed in on increased demand for staples. And online merchants such as Temple & Webster Group Ltd (ASX: TPW) went gangbusters from customers trapped at home.
But perhaps they all had their strong upwards run in 2020, because 2021 wasn't super-impressive for the prices of retail shares.
"Retail stocks mostly tracked sideways for the better part of 2021 despite delivering big growth and increased dividends and buybacks," Tribeca Investment Partners portfolio manager Jun Bei Liu told The Motley Fool.
Indeed Woolworths shares are up 11% this year while Temple & Webster is down 11%, cancelling each other out.
So how will 2022 fare for Australian retail as the world battles inflation, supply constraints and new coronavirus variants?
The year of 'small returns'
Unfortunately, Liu predicts next year will be another period of "small returns" that will mostly come from "higher dividends".
"Retail sector has been the key beneficiary of COVID stimulus/handouts and lack of travel," she said.
"Many of the mega-cap retailers are going to experience some of the toughest comparable periods — most will have revenue declines."
International border blocks, now exacerbated by the Omicron variant of COVID-19, remain a worry.
"Costs will be going up for them with severe global supply chain disruptions as a result of border closures."
Liu feels like Wesfarmers Ltd (ASX: WES) and food retailers — such as Woolworths, Coles Group Ltd (ASX: COL) and Metcash Limited (ASX: MTS) — already have "stretched valuations" while seeing "declining earnings".
The election could bring a windfall for consumers
However, merchants selling discretionary products might have better luck.
"Aside from just cheap valuations, Australian elections generally prove to be positive for the consumer sector," Liu said.
"We see possibilities for tax cuts to be pulled forward which will be positive for the discretionary retailers such as JB Hi-Fi Limited (ASX: JBH)."
A federal election must be held no later than 21 May, with both major parties already in campaign mode.
"We are likely to see more stimulus to consumers though not meaningful in comparison to the handout over the past few years," said Liu.
"Fiscal spending will be another area of focus, though most have been discussed in the past 12 months."
The other angle for discretionary retailers, of course, is increased foot traffic in shopping centres.
"Retailers whose earnings will benefit from a reopening economy such as Lovisa Holdings Ltd (ASX: LOV) will likely to outperform."
