Consumers using their discretion

June-half profit growth, down 5 per cent on the previous corresponding period, was the worst since the global recession, Deutsche Bank analyst Tim Baker says. Profits for this financial year were cut for two-thirds of companies by 2 per cent in aggregate but, Baker observes, 57 per cent of companies ended up beating expectations.

“Investors were not overly worried,” he writes. “By size, the biggest negative contributions have come from Commonwealth Bank, Telstra, National Australia Bank, Australia and New Zealand Banking Group and Suncorp. In contrast, BHP Billiton, Wesfarmers, QR National, Rio Tinto and Newcrest have been on the positive side of the ledger.” Baker says the banks have “largely disappointed”.

Maintaining profit margins is looming as the biggest challenge but underlying consumer demand remains reasonable. Baker says claims about depressed consumer sentiment and spending are exaggerated: “High savings and rising prices for essential items (utilities, housing, etc.) are often cited as factors holding back discretionary spending. But the saving rate has barely moved in three years, meaning spending has grown in line with income.

“ABS data show that even with inflation in non-discretionary categories, discretionary spending is growing at a solid pace. So why are many listed companies not seeing the consumer dollar? Because consumers continue to grow spending more on services (travel, eating out) and less on the goods stocked and transported by listed companies.”

Baker says the current circumstance is the reverse of 2010-11, when spending lagged sentiment. “Looking at the detail, views on household finances are at recessionary levels but attitude to
buying household items is reasonable and dramatically higher than in recessions.”

Baker says investors should be underweight domestic cyclical sectors and overweight in banks because bad debts could be lower than expected.

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