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Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Thematic (Sector/Industry)

<ul class=""><li>Australia’s high level of household debt leaves it vulnerable to the next major global economic shock. It's been nearly 10-years since the Global Financial Crisis (GFC) and another significant shock is inevitable, even if it’s not of the same magnitude.  The immediate impact of the accumulation in debt has been weaker-than-normal consumer spending.  Wealth effects highlighted by withdrawal of housing equity have been absent.  </li><li>More specifically, the Sydney housing market is the key concern. In past cycles, net inter-state migration out of NSW has helped spread national housing risk, but in the current cycle this hasn't occurred because of the mining downturn.  Indeed, more balanced housing risk and stronger growth would emerge if housing equity was to begin moving out of Sydney.  </li><li>Most of the additional purchasing power provided by the 2.1%pt decline in mortgage rates, and the fall in savings has been invested in housing leaving a limited boost to after-tax disposable income. The decision to sacrifice spending on consumer goods for investment in housing has been a headache for monetary policy as it attempts to prop-up growth without adding to economic risk.   </li><li>The listed retail sector has been faced with tough conditions over the past few years due to weak income growth and this looks set to continue. The entry of Amazon into Australia next year and sharp increases in electricity prices from 1 July 2017 add to our concerns for the sector. The technology-based retailers appear better positioned than their bricks-and-mortar counterparts, with <a href="https://www.smartkarma.com/entities/2738" target="_blank" data-smartkarma-citation="entities:2738">Trade Me Group Ltd (TME NZ)</a> probably offering better earnings quality at a reasonable value than <a href="https://www.smartkarma.com/entities/17059" target="_blank" data-smartkarma-citation="entities:17059">Webjet Ltd (WEB AU)</a>. <a href="https://www.smartkarma.com/entities/2738" target="_blank" data-smartkarma-citation="entities:2738">Trade Me Group Ltd (TME NZ)</a> also has the advantage of being exposed to the New Zealand household sector, which is less geared than Australia. </li></ul>

Australia’s high level of household debt leaves it vulnerable to the next major global economic shock. It's been nearly 10-years since the Global Financial Crisis (GFC) and another significant shock is inevitable, even if it’s not of the same magnitude.  The immediate impact of the accumulation in debt has been weaker-than-normal consumer spending.  Wealth effects highlighted by withdrawal of housing equity have been absent.  More specifically, the Sydney housing market is the key concern. In past cycles, net inter-state migration out of NSW has helped spread national housing risk, but in the current cycle this hasn't occurred because of the mining downturn.  Indeed, more balanced housing risk and stronger growth would emerge if housing equity was to begin moving out of Sydney.  Most of the additional purchasing power provided by the 2.1%pt decline in mortgage rates, and the fall in savings has been invested in housing leaving a limited boost to after-tax disposable income. The decision to sacrifice spending on consumer goods for investment in housing has been a headache for monetary policy as it attempts to prop-up growth without adding to economic risk.   The listed retail sector has been faced with tough conditions over the past few years due to weak income growth and this looks set to continue. The entry of Amazon into Australia next year and sharp increases in electricity prices from 1 July 2017 add to our concerns for the sector. The technology-based retailers appear better positioned than their bricks-and-mortar counterparts, with Trade Me Group Ltd (TME NZ) probably offering better earnings quality at a reasonable value than Webjet Ltd (WEB AU). Trade Me Group Ltd (TME NZ) also has the advantage of being exposed to the New Zealand household sector, which is less geared than Australia. 

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