Macquarie's top picks for the slowing Australian consumer

The largely resilient Australian consumer is starting to slowdown. Here's what Macquarie is seeing and the stocks it favours going forward.
Sara Allen

Livewire Markets

The Australian consumer has been remarkably resilient to high inflation and rising interest rates over the past year, but we may have finally reached the tipping point. Australians emerged from lockdowns cashed up and ready to spend, but that savings buffer might finally be gone if latest data is any indication.

While consumer confidence (based on the Westpac-Melbourne Institute Consumer Sentiment Index) rose slightly in June, this is off the back of a 7.9% plunge in May, and confidence around jobs has also started to fade – interesting given the otherwise still tight labour market. 

Off the back of a drop in consumer spending in April, a number of big retailers have reported declining earnings, such as David Jones, Best & Less (ASX: BST), Treasury Wine (ASX: TWE), Retail Food Group (ASX: RFG) and Premier Investments (ASX: PMV).

In its latest research note on the Australian Consumer Sector, Macquarie Group argues that this points to a significant shift in consumer behaviour and that we are finally seeing the rising cost of living drag on spending. The investment bank suggests there are significant headwinds emerging and the tougher environment tipped for over a year has finally arrived.

The trends Macquarie sees in the current market

Discretionary spend is always one of the first areas for people to start their cuts in tough economic times. Macquarie notes it has been in contraction for almost a year now.

Economists have long tipped the impact of inflation and rising interest rates to be felt more by younger demographics who are more likely to experience mortgage and rental stress, with lower savings buffer. Older demographics were also anticipated to benefit from an income boost via rising interest rates. The data plays this out. Spending volumes have declined for those aged 18-54 years, while remaining above inflation levels for those aged 55 years and above.

The biggest slowdowns have been seen in electronics, hardware and furniture. Macquarie also notes that spending on consumer staples has largely remained stable with some slight growth to reflect inflation.

The search for value has also commenced in the consumer sector. For example, Wesfarmers noted that it has seen consumers trading down from higher-end stores into Kmart. This reflects the pattern David Jones has experienced with a slowdown in customer traffic and sales in homewares and big ticket purchases down.

Macquarie’s top picks in this environment

“In this environment, we prefer consumer staples Coles (ASX: COL) and Endeavour Group (ASX: EDV)) over consumer discretionary (JB Hi-Fi (ASX: JBH) and Harvey Norman (ASX: HVN)),” wrote Macquarie analysts in their 23 June 2023 report.

Macquarie identifies the supermarkets as having the lowest risks in a consumer slowdown due to the lower likelihood that consumers will materially cut down on food staples. Based on Market Index’s broker consensus reports, Coles is largely viewed as a BUY by other brokers.

“COL is well-placed in the current environment with its value-positioning, which should drive market share gains,” wrote Macquarie analysts.

1 year price chart for COL v S&P/ASX 200. Source: Market Index, 27 June 2023
1 year price chart for COL v S&P/ASX 200. Source: Market Index, 27 June 2023

Other companies it tips to OUTPERFORM as follows:

  • Endeavour Group (ASX: EDV), noting some pressure on its hotels business and risks created by changing gaming regulations.
1 year price chart for EDV v S&P/ASX 200. Source: Market Index, 27 June 2023
1 year price chart for EDV v S&P/ASX 200. Source: Market Index, 27 June 2023

  • Treasury Wine Estates (ASX: TWE), which has some significant margin improvement for FY23-FY25 built into expectations.
1 year price chart for TWE v S&P/ASX 200. Source: Market Index, 27 June 2023
1 year price chart for TWE v S&P/ASX 200. Source: Market Index, 27 June 2023

It has a NEUTRAL rating on Harvey Norman, Wesfarmers (ASX: WES), Dominos (ASX: DMP), Collins Food (ASX: CKF), Metcash (ASX: MTS) and Woolworths (ASX: WOW), while holding an UNDERPERFORM rating on JB Hi-Fi (ASX: JBH).

Livewire gives readers access to information and educational content provided by financial services professionals and companies (“Livewire Contributors”). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

Sara Allen
Content Editor
Livewire Markets

Sara is a Content Editor at Livewire Markets. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Sign In or Join Free to comment