Company Interview / From business class flights to eating at home | The bifurcation of the consumer

Key points:

Resilient reporting season with downgrades in earnings.Bifurcation in consumer spending; lower incomes struggle, affluent thrive.Anticipated rate cuts could boost market sentiment and broaden market rally.

Hamish Tadgell from SG Hiscock & Company describes the Australian reporting season as resilient despite economic challenges. He notes decelerating growth, increased business costs, and some margin pressure but remains positive overall, highlighting earnings downgrades and strong performance from retailers like JB Hi-Fi (ASX: JBH) and Supercheap (ASX:SUL).

Shawn Lee points out the bifurcated economy, with low-to-middle income groups struggling, evidenced by reduced childcare hours and declining fast food sales at KFC and Domino's (ASX:DMP). Conversely, affluent demographics continue spending on luxury travel, reflecting differing economic impacts.

Hamish discusses potential rate cuts and their influence on market sentiment. He notes concentration in recent ASX 300 returns and expects a broader market rally with rate reductions. In Australia, persistent inflation remains a concern, delaying rate cuts compared to the US.

Full unedited transcript below:

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Something exciting here. We've got a little bit of a panel happening now. We know reporting season just concluded. So what were some of the key trends and themes coming out of corporate Australia? I've got both Hamish Tadeo and Sean Lee from SG, his Hiscock and company to join me to discuss. I'll start with you, Hamish. I mean, a pretty resilient set of results here. What was sort of your report card for reporting season? Yeah. Look, we describe it exactly that resilient, I think in a tougher economy. And, uh, most companies are highlighting that decelerating growth cost of doing business is higher than what it was pre-COVID. Um, and sort of started to see some margin pressure. Um, but on the whole, I have to say that, um, you know, it was it was a reasonably good reporting season. Um, the other thing I'd highlight is just that earnings continue to get downgraded. So earnings came down about 3% for 24. Uh and for 25 they've come down about similar amount. Does that tell us though that you really have to hit it out of the ballpark with your earnings to be

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rewarded here. Well, either that or um, relative to expectations, you've got to exceed. So we saw during a lot of price volatility clearly during during reporting because as you do. But a lot of it's about expectations coming in. Um, and we saw a number of retailers for example performed very well. The JB Hi-Fi super cheap. But I think it was that their their numbers were down. The growth was down on the previous year, but uh, it was stronger than expected. Um, and so I think that's just reflecting this sort of bifurcation that we're seeing also in the economy. That would be the one of the other key themes I'd highlight. Yeah. Um, and that's been really shown in bifurcation of how stocks are performing. And I think what's interesting there, and I'll ask you, Shawn, about this too, with some of the forward guidance from some of those retailers the first seven weeks of 2025 looking pretty low. We know consumer confidence is pretty much still in the doldrums, although their CBA household spending index was, um, a little bit strong today. What are you seeing in terms of where the consumer

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is sitting and who's being hurt the most. Yeah, I think if you look through a reporting season, it was very mixed. You know, we sort of split it into really two broad categories. You got the sort of low and middle income doing it the toughest at the moment. And there's a few good examples down there. You know, even if you look at things like childcare operators like G8 education, they're talking about parents reducing the number of hours. They're talking about enquiry volumes coming down and, you know, kids being taken out of childcare to save a few bucks. So that's a good telltale sign as to the stress that we're seeing out there. We're seeing also fast food companies KFC, Domino's Gomes were correct. Well not so much Guzman, but you know, KFC and Domino's really seeing volume growth go downwards. People are consuming more at home then they're seeing. Then they're consuming outside. And you know, I think again, it's really that crunch that's coming at the lower middle end. However, if you look at the top end of town, you know, the higher income people, the more affluent, perhaps those retired baby boomers, they're still spending. So we spoke with from Flight Centre recently, and there's the luxury travel business That's ten, 20 or $30,000 holidays

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overseas business class airfares. That's flying. You know, that's going very, very well. And I think that trend is continuing. And that trend is also observable in the sort of trading update for seven week data as well. Yeah, it's really interesting, very two different parts of the economy. I wanted to switch a little bit from retail into the rates though, because there's been a lot of focus about whether or not potentially there's been a bottom and what sort of opportunities you might be looking for. Yeah, definitely. So we think so. We think one of the clear themes coming out of reporting seasons, you saw a bit of an inflection point in the rates. You know, if you think back over the last 24 months or so, it's been headwinds. It's been higher interest rate costs, higher debt servicing costs, lower dividends. We think all those things are easing. A good illustration that I often use is, you know, in in mortgage. Well, you had a lot of people who borrow at 2% and had to refinance up to six, 6.5% on their mortgages. And they felt the pain through that period of time. The REIT's done exactly the same thing. They had very low debt. And now that all all the debt books are now re Re Re reversed back to

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sort of market rates. So that actually eases up on, you know, growth expectation that allows these companies to actually grow into the next couple of years. So that's one. And then I think you see cap rates are starting to peak as interest rates start to peak out. And transaction activity is probably the final point. I mean, transaction activity is actually coming back to life. You're seeing offshore capital come back in bid sell prices starting to narrow a little bit and a lot more activity. So we're positive on the rates. All right. Well Hamish how does this all then play into how people should be positioning. Well I think clearly the focus at the moment is on whether we're going to get interest rate cuts. And I think the the fed reserve at the Jackson Hole meeting last month gave probably the clearest indication you get from central bank, central banks that they're going to cut this month. And so I think we're at the start of a rate cutting cycle. The question is really going to be how aggressive that is. But I think the mere fact that we're going to get rate cuts is, you know, is going to be good for sentiment. Um, we think also that that allows a broadening out of the market. So the market rally,

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uh, really in the last 12 months has been very, very narrow, very concentrated in sort of half a dozen stocks. In fact, 72% of the return in the ASX 300 last year was from just six stocks. Um, and we've started to see through reporting season a little bit more of a broadening out. Um, we think if we start to see some rate cuts come through, then that will see that continue. Um, in Australia, um, you know, clearly we're lagging. We're starting off a lower point, um, than the US. And clearly we've got some homegrown issues that are really, I think, seeing inflation here more persistent and stubborn, particularly on the service side, uh, than than in the US. Um, so I think we're still confident rate cuts will come, um, in the next sort of six, 12 months here. The timing of it, though, is a little bit more dependent upon how the data evolves. And I think, you know, the RBA last week, uh, Clearly highlighted that they're still concerned about inflation. And we need to see, uh,

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more wood chopped, I guess, on that in that inflation and more confidence that it's under control before we will start to see the rate cuts here. Do you think Michelle Bullet might be getting a little bit of frustration too, with the people that are spending on these ten, $20,000 holidays that's pushing inflation higher. Well, I think it's you know, clearly that

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I do think that, uh, you know, the fiscal spending has has contributed to it. But at the same time, you know, I think it's also very valid to say that, uh, the fiscal spending and a number of the government initiatives have kept us out of recession. I mean, the point is that, uh,

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um, employment growth has been very strong. And at the end of the day, um,

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that's kept unemployment rate down. And that's, I think, contributed to the resilience that we've seen in the economy, which we spoke at the start of the beginning about. I wonder if either of you have a thought too, on the potential IPO pipeline. If we are going to see rate cuts in 2025, does that make it more attractive to to look for new capital? Yeah. Look, I think, you know, we've seen obviously quite a successful listing of gig investment. You know, I don't you know, I think we've also seen a lot of secondary equity raisers come to market more recently in spaces which are pretty exciting, like data centers we saw next DC do a placement recently, and then we saw National Storage Rate do something 1 or 2 days ago. So I think that ECM activity is starting to come back to live. Um, clearly you need, you know, strong markets and people expecting this broadening out to occur in terms of the IPO pipeline. And we haven't really heard of really big major ones that are going to come in re open up the window. But I think there's some positive green shoots, particularly in the secondary raisings that are coming true. So more broadly,

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Sean, where do you sort of look for opportunities for stock picking amidst the macro environment that Hamish was talking about there? Yeah. So one of the areas that we're quite excited about is residential. So we spoke about rates just now and we said, you know, we think that, you know, the cycle is starting to turn in our favor, but we've put a bit of capital into New Zealand residential. And clearly the OCR down there has come back already and the RBNZ cut rates last month. So, you know, at least you're not having to guess about when like as we do here with the RBA, something that's positive. And you know the other point is really house price um growth down there in New Zealand actually come off 20%. Stocks are trading extremely cheap. And so we've added a retirement uh, developer in New Zealand called Summerset Holdings. And we think that there's um, there's very strong demand growth in that part of the business, like just structural ageing demographics that are going to come through. And you probably make a good return over 2 or 3 year view. Interesting. What about the outlook for resources or banks, given that, you know, we know that there's the China story, which is very much

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affecting some of the miners. But then the banks kind of looking potentially stretched, UBS said. Stay with the bank, stay away from the minors. What does SG Hiscox say? I think the the banks do look stretched on valuation, I think. But the reason for it really has been that we've pretty much had the soft landing scenario here and unemployment's remain reasonably low. And I think the banks could well continue to be very well supported if the employment market holds together. At the end of the day, whenever we speak to bank CEOs, they always say, tell me where the unemployment's going and I'll tell you where the bad the bad debts are going. Yeah. Um, on the other side, you know, they have outperformed versus resources incredibly 50% in the last 12 months. And so, uh, we've certainly seen a correction in the resources. And we certainly think there's some value starting to open up. Um, why have they derailed? I think there's really two reasons. One is, um, some supply

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side concerns. Um, in terms of, you know, iron ore, but also, um, on the lithium side in particular. Um, and then the economic economic growth. And so you spoke about China, but more broadly, global economic growth in this question about whether the US is going to go into a hard landing or not. I guess we're of the view that more of a soft landing muddle through than a than than a hard landing. Um, and if we start to get some rate cuts, then I think that should be supportive for, for for resources more generally. Um, the other area which we think is really interesting at the moment is energy. We're still very much of the view that, um, you know, the energy transition and the thematics around that gas is very important, um, for firming capacity. And, uh, clearly we've seen a lot of the gas stocks and energy stocks in Australia come under a lot of pressure recently as a result of, again, that slowdown in global growth. And, um, you know, I guess Middle East concerns. But,

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um, that's starting to look very attractive to us, um, and particularly some of the East Coast gas producers like Beach Energy here, we think looks really interesting. All right. Some really great areas of what to look at. What Sean, would you say avoid at the moment? Uh, look, we continually so probably call out two things. We continue to be quite cautious on the consumer. You know, we think some of the updates coming out, there are seven weeks of trading data post reporting season was was was poor. So particularly at that sort of low and middle end where margins are getting squeezed, volumes are coming down, but rents and labor costs continue to go up. So we're avoiding that space. We're avoiding things like automotive dealerships where we're seeing auto cancellation rates shoot up. You know, people ordered cars through Covid because they had all these excess savings. And when the cars are being delivered now, they're going, oh, no, actually, you can take my deposit back. I don't need the car anymore. LOL. Yeah, yeah. So I think that's, that's some of the, some of the areas we're avoiding in, in private hospitals, there's obviously a lot of pain being seen in that area. You know, that's probably another area that, you know we're going to wait and see what those reviews come up with.

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But there's some structural challenges down there in both private hospitals and some of the private insurers.