It is interesting to see the latest Consumer Sentiment graph that was published shortly after the recent Federal Budget. We have reproduced it below.
What we find most interesting is that consumer sentiment in Australia is now at levels not seen since the depths of the Euro Debt Crisis and the GFC.
While we acknowledge there were some 'negatives' for many in the budget, we would argue that the Federal Budget was hardly a show stopper. Yet it has resulted in pushing peoples outlook sharply to the negative.
Confidence around housing is particularly fragile in the major states with the index being down by around 30% from September's highs in both NSW and Victoria.
Waning confidence in the housing maret is also apparent in the Index of House Price Expectations. The index fell by 9.8% in May to its lowest level since January 2013. Concerns over high prices and limited affordability are likely to be the key reasons behind these trends.
If we look a little more closely at the Australian consumer, we can see that the Australian consumer has not deleveraged since the GFC. This can be seen in the chart below which shows that households debt to income ratio is virtually back to levels seen just before the GFC. The average Australian household is very highly leveraged. It would seem that it takes very little to 'scare' highly leveraged households, such as the recent Federal Budget.
What does this mean for investors?
Consumer sentiment, which is pivotal to spending patterns (ie higher consumer confidence results in higher spending). The surveys suggest that Australian consumer sentiment is best described as fragile. This is at a time, when the economic headlines are suggesting that the Australian economy is performing OK.
We are suggesting to exercise caution before investing into sectors that rely on discretionary consumer spending given that households have very high debt levels, the government has made it clear that it intends to reduce government benefits (which can be argued is a cut to household income) at a time where it seems that interest rates can only move up from here.
This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.