What if the data is right?

September 25, 2017
What if the data is right?

A broad-based and pessimistic view currently pervades the Australian economy and, in particular, the labour market.

Issues being raised range from the impact of the introduction of robotics, the ‘casualisation’ (“Uberisation”) of the workforce and consistently declining Australian competitiveness.

The narrative, while interesting, is inconsistent with the actual data and raises an important question: what if the data is right?

Let’s re-cap recent Australian employment statistics:

  • 283,000 jobs have been created this year, with August 2017 the 11th straight month of expansion (the longest consecutive increase since 1994);
  • August job advertisement postings were up 13.2% compared to a year ago – marking continued acceleration on May (+8.8%), June (+10.7%) and July (+12.6%) – according to the SEEK New Job Ad Index;
  • Aggregate employment has grown 2.4% this year and has been skewed towards full-time positions (68% of all jobs); and
  • The unemployment rate has held broadly flat at 5.6%, despite a rising participation rate (64.7% to 65.3%) (see below).

The pessimism about the state of the Australian employment market has now extended to how investors are thinking about consumer discretionary stocks, which have been one of the worst performing segments of the market in 2017. Retailers, the hardest hit by the negative sentiment and concerns around Amazon, have fallen 22% this year (see below) despite several reporting solid FY17 results and analysts revising FY18 earnings growth estimates up 2% in just the last month.

It is, however, worth noting that:

  • Population growth is nudging 2%, one of the highest in the world among developed economies;
  • Gross disposable income has also grown 2% in the past year;
  • Utility bills are climbing, but the issue has been blown out of proportion given utilities account for only 1.8% of consumer expenditure (and are about a 15 bps headwind); and
  • Consumer debt levels are high but mortgage serviceability* remains at normal levels at slightly over 8%. While rising interest rates are a risk they are not imminent, and they are likely to be accompanied by a stronger economy and wage inflation

We have clearly taken a contrarian stance, but our baseline position is consistent with the data. As always it is critical to separate fundamentals from sentiment; fundamentals point to an improving employment market and the consumer being in significantly better shape than most people appreciate.

The negative sentiment has given us cause to increase holdings in consumer discretionary stocks that we believe are well placed to withstand new competition and increase market share. Our large cap portfolios hold positions in JB Hi-Fi (JBH), Super Retail Group (SUL), Star Entertainment (SGR) and Crown Resorts (CWN).

* Household interest payments as a proportion of household disposable income