ASX retail shares had a pretty decent year in FY24, with the S&P/ASX 200 Consumer Discretionary Index (ASX: XDJ) rising 19.29% over the 12 months.
Does that strike you as strange? In the middle of a cost-of-living crisis?
Consumers have been cutting back big-time on their discretionary spending for many months now, yet ASX retail shares went up in FY24 at more than twice the pace of the benchmark index.
The S&P/ASX 200 Index (ASX: XJO) rose by 7.83% in FY24, or 12.1% if you include dividends.
So, why did this happen?
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Why did ASX retail shares rise during a cost-of-living crisis?
David Rumbens, a partner at Deloitte Access Economics, has an answer for us.
In a blog, Rumbens explained why discretionary stocks defied sticky inflation and high interest rates in FY24 to rise by more than 19%.
Rumbens said:
Consumer discretionary stocks defied expectations by posting a 19% increase despite the economy experiencing per-capita recession.
This unexpected strength largely came from the first nine months of the financial year where consumer savings were being run down.
Ah-ha! Household savings.
Household savings reached a historical peak during the COVID years. The household saving ratio, which means the percentage of income saved, hit an all-time high of 24% in the June 2020 quarter, according to data from the Australian Bureau of Statistics (ABS).
This happened for three reasons.
Firstly, we weren't spending much during lockdowns.
Secondly, many Australians received generous government stimulus payments, such as a beefed-up JobSeeker payment and the JobKeeper payment.
Thirdly, emergency low interest rates during the pandemic meant many households with mortgages saved money and left it in their offset accounts.
A saving grace for the economy
This major increase in household savings has turned out to be a massive saving grace for our economy.
This is because what followed COVID was initially unexpected.
As the world reopened and inflation started rising, many economists and central banks predicted the inflation spike would be "transitory" and not too big a deal.
But it turned out to be a big deal.
Inflation hit a peak of 7.8% in Australia in the December 2022 quarter as the cost of living skyrocketed.
Between May 2022 and November 2023, the Reserve Bank of Australia (RBA) raised interest rates 13 times.
So, those pandemic savings are certainly coming in handy for struggling households today. Not only are they enabling people to continue spending at the shops, they're also protecting home values, too.
You see, despite home loan repayments increasing by 30% to 60% since May 2022, home loan arrears are still very low, according to the RBA. That means not too many people are being forced to sell, and that protects the market by keeping supply in check.
In its latest Financial Stability Review, the RBA noted that pandemic savings were a key factor enabling borrowers to keep up with their repayments.
The RBA said:
Households are coping well due to a strong labour market, which is allowing them to increase their hours or get a second job if necessary.
They are also drawing on large savings buffers, partly created by pandemic stimulus and lower spending during lockdowns, and have reduced their discretionary spending as necessary.
The bank noted that about half of all borrowers had enough savings to pay their loans and cover the cost of essential living expenses for at least six months.
Another factor supporting ASX retail shares in FY24 was the ongoing spending among baby boomers.
CommBank research shows the baby boomers are still spending pretty freely at the shops, despite the cost of goods and services, like travel, going up.
The boomers are one of the biggest population cohorts in Australia's history, so the fact this group is still spending is helpful for retailers in a cost-of-living crisis.
Best 3 ASX retail shares of FY24
Here are the best ASX 200 retail shares of FY24 based on share price growth, according to data from S & P Global Market Intelligence.
Lovisa Holdings Ltd (ASX: LOV)
Budget jewellery retailer Lovisa led the consumer discretionary stocks in FY24 with a 70.3% share price gain. The Lovisa share price closed the session on Thursday at $32.34, down just 0.03%.
Premier Investments Limited (ASX: PMV)
The second top-performing ASX 200 retail share in terms of share price growth was Premier Investments, up 53.8% over the 12 months. The Premier Investments share price closed at $29.89 yesterday, up 0.88%.
JB Hi-Fi Ltd (ASX: JBH)
The JB Hi-Fi share price gained 39.9% over FY24. The ASX retail share closed at $65.25 yesterday, up 1.34%.
