Barrenjoey chief economist Jo Masters says it’s the question that’s coming to define reporting season: why are investors so bullish and economists so wary?
The ASX 200’s consumer discretionary total return index is up about 14 per cent in the last year, compared to a 6 per cent return from the ASX 200. So how do we explain the divide? Masters says expectations matter. Investors were braced for bad news out of these retailers, but the results – particularly updates on trading in the last six weeks – haven’t been as bad as feared, raising hopes for more of the same.
In the 20 years before the pandemic, consumption was driven by a combination of rising volumes (60 per cent) and rising prices (40 per cent), but in the last year, price has contributed 93 per cent of nominal spending.
Another factor supporting local stocks is the bullish sentiment in the US, where the S&P 500 has set a series of records, inflation is trending down (even accepting this week’s CPI surprise), productivity is surging, and the economy looks in little danger of entering a recession.“But our economy looks very different from the US,” Masters says. “All the data here is showing us that the economy is not just slowing, but slowing very rapidly at a top-line level.”
Per capita consumption and growth is particularly poor, while Thursday’s unemployment numbers suggest the labour market may be deteriorating faster than expected, albeit from historically strong levels.
But Masters says the story told by economic data and profit results may not be as different as share price movements would suggest.
At JB Hi-Fi, for example, total sales fell 2 per cent and net profit fell 20 per cent in the December half. While analysts were happy with 2.5 per cent sales growth in JB Hi-Fi’s Australian arm in January, Masters says that once inflation (running at 4.1 per cent) and the strongest population growth in 50 years is considered, those sales numbers look weak.
The timing of Australian and US rate cuts remains an issue, given central bank concerns about sticky inflation. In recent weeks, US markets have gone from pricing 1.4 per cent worth of cuts to pricing cuts of 0.9 per cent.
But Masters also questions whether local investors who’ve priced in rate cuts are ready to weather the deterioration in economic conditions that will be required to convince the RBA to ease.
July’s tax cuts may take a while to flow through to spending, and the transmission of rate cuts through the economy will be even more complicated, as illustrated by the fact banks are still passing through November’s rate rise.
Again, the rebound in consumption and economic growth is likely to come. But are investors who favour retail stocks ready to ride out the near-term weakness that Masters says is coming?
“I think there’s going to be a white-knuckle moment when investors ask themselves: do I still have faith in all that good news that I’ve priced in?” Masters says.
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