How to position for a lukewarm Australian economy

The Quarterly GDP numbers are out, and boy they are not great. QoQ real GDP (top left, in the graph below) at 0.13%, and below consensus at 0.2%.

The matching commentary from the ABS was similarly subdued (see below, yellow highlights). And yet the RBA is warming up the vocal cords (jawboning) and readying the trigger finger! This is not, in our view, an environment that you would want or should hike into.

Domestic final demand, shown below, is the key. Australia’s imports and exports move around, final demand is a good way to dial back some of the noise in the accounts. And growth there is modest also.

Note the rate sensitive sectors (where we desperately need more  building/spending/expenditure/capex, not less!) are rolling over. GFCF dwellings is a disaster...

...and not especially likely to get better, given where (mortgage) interest rates are.

Rates, building costs, affordability have all combined to make new development challenged. Builders are going bust, and yet no-one can afford a home (well, certainly not in or by the numbers of the relatively recent past). That very recent rise in the debt service ratio, in Australia (large by any international standard) does not auger well for the consumer, moving forward.

The investment implications are, we think, reasonably straightforward. GDP data do not scream a pressing need for further hikes. Rates, at the level that they are, unfortunately, are depressing the one sector we need to be firing (building).

The consumer strength has been present, up till now, however given a) downgrades from consumer stocks and b) noted lags in how long it takes for prior policy moves to kick in (i.e., as hikes from months past work their way through the system) that strength should not be extrapolated forward.

We continue to see better opportunities elsewhere (international equities, for example) relative to domestic equities, and within domestic equities, continue to preference those that are either defensive in nature (staples, telecos, healthcare, insurance) or relatively insensitive to domestic conditions (select energy and material stocks). We remain underweight the pointy parts of the market (banks) and those most exposed to the dynamics above (builders, domestic cyclicals, and consumer discretionary stocks).