Aus macro
Well, a terrible set of numbers for the retail data. We maintain our preference for international over domestic (by a very large margin).
Firstly, here’s the month on month print.
That’s bad.
Now, to the levels. In our view, they were overcooked thanks to the pandemic, which sent most retailers scrambling to order all the stock that they could, predicated on demand that would remain high for (in their view) a long time.
Now, those levels are beginning their “reversion to the mean” as spending patterns (what people buy, and how much, in turn in a function of relative affordability, e.g. discretionary expenditure impacted by mortgage rates, or food and energy inflation outstripping ex food and energy expenditure, such that there’s a lower share of wallet left over for other stuff) normalise.
I did the italics just so you can see where the emphasis of the sentence should start and end.
We also had credit data out, this is the yearly change in total credit (stock, not monthly flows), and it is a similar enough story.
We’ve peaked, and are now rolling over, in credits’ case because the price of credit doubled, meaning less is demanded.
Conclusions
I had just finished reading the work of Australia’s most generically readable permabull, who is bullish on the outlook for Australian shares.
That’s fine, it takes many views to make a market, and we are, gently speaking, on the other side of that. It doesn’t mean having “none”, or no exposure, as often the instinct is to take a bearish sounding outlook and thunder out of the asset class in it’s entirety.
But it definitely reduces the desired exposure at the margin, which to our mind supports the DAA underweight. The commodity story, the China reopening story, have been good reasons not to go too aggressively underweight; the residual strength of 2020-2021’s fiscal stimulus measures was another (the household savings story from pandemic related transfer payments like JobKeeper and JobSeeker).
In both cases, the market has (to our mind) priced in much of those happier circumstances, now, we can think of what the ideal weight would look like, if-as-should-when things weaken further.
At the very least, outside of the highest quality names, it makes very cyclical domestic stocks (think discretionary retailers, and also the builders) very hard to hold for the medium run.
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