Consumer slowdown next big hurdle for ASXAs global investment...

Consumer slowdown next big hurdle for ASX

As global investment banks peel back their forecasts for the local share market, a slump in consumer confidence is going to hurt. JAMESKIRBY WEALTH EDITOR 5:23PM MAY 11, 2022

Australian sharemarket investors face a test of mettle in the coming days as the ASX tries to hold off repeating the Wall Street rout that could see losses doubling on the ASX if sentiment sours further.

A string of broking reports point to new impediments if the ASX – now down 7 per cent for the year to date – is to come anywhere near the 9 per cent total returns the market had pencilled in for calendar 2022.

Australia has been cushioned by banks and miners which has allowed the sharemarket to avoid the 17 per cent drop registered year to date on the S & P 500.

But global investment bank Morgan Stanley this week cut its target for the ASX 200:

“We cut our price target for the ASX 200 (Jun-23) to 7150 from 7350. We expect further de-rating pressure reflecting the mix shift to Resource sector earnings and still some lower valuation adjustment for Industrials as yields rise,” the New York investment bank said in a report. (The ASX closed around 7065 on Wednesday).

Concerns are growing that rapidly fading consumer sentiment will hit the retail sector hard in the months ahead as household spending is crimped by higher mortgage rates

On Tuesday, the latest consumer sentiment index reading fell 5.6 per cent in the month of May to represent the lowest level since August 2020.

On the share market, the weaker sentiment may translate quickly to investors less prepared to pay high prices even for companies where earnings are rebounding – especially the retail sector.

According to Wilsons Research: “Consumer spending is likely to be affected directly by higher interest rates: There is a risk that more households will be under pressure to pay their bills and put food on the table if mortgage repayments and inflation rise. Households with lower incomes will be less likely to spend money on clothes and electronics. This could be a very challenging period for retailers”.

Wilsons points to retailers Harvey Norman and Wesfarmers (owner of the Bunnings chain), real estate groups REA and Domain, along with housing REITs Mirvac and Stockland as stocks at risk.

Meanwhile, NAB’s chief economist Alan Oster says ‘international factors’ remain the main risk for the domestic economy.

Mr Oster points to “Growing concerns over global growth, renewed lockdowns in China and considerable uncertainty over the normalisation of supply chains and commodity prices. Further out, the ongoing normalisation of goods and services spending and international trade remains a key unknown.”

Moreover, there are now rising fears that a rebound in company earnings will not deliver as much as expected: The range of companies managing to bring in results that disappointed the market has been extensive even in the few weeks we had already seen the interim reporting season.

REA along with investment bank Macquarie have disappointed the market. Similarly, among industrial stocks the list of those missing expectations is lengthening – it already includes auto group ARB, payments company Tyro, fund manager Janus Henderson and travel operator Corporate Travel Management.

The most difficult segment of the market remains the tech and biotech sector where investors are nursing serious losses – the tech heavy Nasdaq has lost more than 25 per cent year to date and champion stocks such as Atlassian have lost almost 50 per cent,

At Morgan Stanley, the research team has suggested the substantial downfall on Nasdaq – the favoured hunting ground for new investors since the Covid crash – means that the so-called Robinhood generation of share investors who swarmed the US market last year have now lost whatever they gained in the initial upswing.