How Australian businesses expect households to cope with the cost of living – and why we should pay attention
Quietly, and without much fanfare, the Australian equity market emerged from a technical correction.
A correction is defined as a 10% drop in the value of stocks from their last peak.
At its lowest point in June this year, the main stock market index, the ASX200, was down 16%, which is very close to what investors describe as a “bear market”, a fall of 20%. or more.
The stock market is now down about 6-8%.
This is remarkable given the wall of worry facing the market: the war in Ukraine, the pandemic, soaring inflation, rising interest rates and slowing global economic growth.
So why are stocks bouncing back? And can it last, or are there much bigger stock market crashes around the corner?
The answers matter to all Australians, but especially to anyone on a superannuation who is about to retire or young Australians investing in stocks to top up their home deposits.
The performance of financial markets also has a substantial impact on a country’s standard of living.
And the answers – or pointers to the answers – are starting to arrive.
Confession season is upon us
According to the law, listed companies are required to update the market with all the information they have that could influence their share price.
This includes the publication of reports on half-yearly and annual results.
It’s called “confession season” because there’s no escaping it and businesses may be forced to air out their dirty laundry.
For example, a company may announce that an investment fell flat or that a product launched the previous year did not find a market.
This may cause investors to rethink the value of the company (its share price).
More importantly, this is the time for a listed stock to provide what’s called “forward guidance.”
That is, the company announces with all the information it has at that time how it plans to behave in the coming months.
It forecasts revenues, costs and profits for the next six to 12 months and sometimes beyond.
Some companies have already reported and from today we will receive earnings updates and forecasts from Commonwealth Bank, Macquarie Group and Telstra – some of the country’s largest employers.
There are weeks of corporate results to deliver, but these next few days will set the tone until other big companies show their case.
We will start to get a sense of how Australian businesses are performing and this is crucial information given the economic environment we find ourselves in.
What this tells us
Last week the Bank of England announced that UK inflation – or the cost of living – was expected to reach 13%.
Britons, the bank warned, were set to suffer the biggest drop in living standards since World War II.
It’s scary, right?
On Friday, Prime Minister Anthony Albanese tried to reassure households that Australia was not following Britain down this path of inflation.
But financial pressures remain for millions of Australian households as they grapple with slow wage increases and higher petrol, energy and food prices, and now borrowing costs students.
The argument has been that households have significant reserves of cash – to the tune of $260 billion – to draw on, but there are obvious limits to how long households can rely on these reserves.
The $260 billion question then becomes, “How do Australian businesses see households coping?”
Companies analyze how well households are doing because their financial results are directly influenced by the financial health of households.
Companies will provide detailed assessments of how tighter monetary policy (higher interest rates) is affecting their business now and how they are expected to in the coming months, particularly the Commonwealth Bank.
Yesterday, National Australia Bank (NAB) revealed that the outlook for its credit quality remained ‘benign’, but warned that the impact of higher interest rates was being offset by higher funding costs.
That’s a complicated way of saying the bank remains under pressure to keep raising interest rates.
This is crucial for the economic outlook.
why is it important
Buyers will have to keep spending in the face of rising costs of living and rising interest rates, fueled by rising RBA rates or rising offshore funding costs for banks.
About 60% of economic growth depends on increased consumer spending, and that consumer spending drives business activity.
The latest data from NAB and ANZ suggests, so far, that businesses remain in a strong and profitable position at the expense of consumers.
A simple average of nominal revenue indices calculated by CommSec shows that the “All Industries” index has risen 20.8% over the past year, the fastest growth in 13 months.
This means that businesses, in general, are doing quite well.
Consumers, on the other hand, are downright miserable.
The Westpac Melbourne Institute of Consumer Sentiment fell 3% from 83.8 in July to 81.2 in August.
“This reading is on par with the lows of COVID and the global financial crisis, although it is still well above the lows of the late 80s/early 90s recession,” the statement said. Westpac’s chief economist, Bill Evans.
This may be because companies are raising prices as much as they can and buyers are willing to oblige them in the process.
“All price and cost metrics hit record highs in July, along with capacity utilization,” CommSec noted.
The key question is: when will this trend collapse?
The answer may be when asset markets, including real estate and stocks, fall due to higher interest rates.
The argument to date has been that households have loosened their purse strings lately because they “feel” richer, rather than confident to spend due to higher wages.
Where are the financial markets going?
Financial markets are waiting for more companies to reveal earnings, but at the same time, analysts are warning that sharp declines in asset prices could be imminent.
“[It’s] quiet summer… [we] could be in the eye of the storm,” says professional investor Henry Jennings.
“BHP is so big now that it’s driving the index.
“We need a bump in iron ore to push BHP up.
“Otherwise I think we are [going to go] on the side for a while.”
AMP’s chief economist, Shane Oliver, has overseen billions of dollars of investment during his career.
“We remain of the view that equities are vulnerable to a pullback over the next few months as central banks are still a long way from peaking and actually cutting rates,” he said.
“The risk of recession continues to rise, raising the risk of significant earnings downgrades and geopolitical risk is still rising, as highlighted by the Sino-US tensions of the past week and the coming semesters. of November in the United States.”
Into the unknown
There’s a lot to digest, let’s break it down carefully.
The biggest threat to the economy and financial markets is inflation.
So far, companies are reacting to their own higher costs by raising prices, which is fueling further inflation.
Households with cash reserves dip into their savings to make ends meet.
There is evidence that other households are starting to cut back on certain items.
The Reserve Bank reacts to rising inflation by raising interest rates, and it will do so until it brings inflation back to its “target range” of between 2 and 3%.
It is unclear how households will react to further monetary tightening, especially given limited or no wage growth.
Corporate Australia is currently giving its best guide to how Australian consumers will respond to the challenges ahead and how that response will influence their bottom line.
Maybe it’s “silent” because it’s time to listen – to listen to what’s coming.
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