Debt. Debt. Debt.
We Aussies can’t get enough of it.
Maybe it’s got something to do with the ‘Aussie dream’. You know, the one that goes: Get a job, ‘buy’ a house using a huge loan – remember: house prices (insert sarcasm) always go up – then have a family.
Or maybe it’s simply a fear of missing out on the red hot property market.
Maybe it’s low interest rates.
It might even be a culture problem. I mean, who doesn’t love a flashy new car?
Personally, I think it’s all of the above.
Whilst I will refrain from digressing into the benefits of remaining debt free for as long as possible (read more here), let’s take a look at how Australian investors can profit from this obvious trend.
Firstly, it goes without saying, to make a profit, one must avoid losing money.
With the average household debt level currently around 180% of gross annual income – up from around 70% in the late 1980s – according to the Australian Bureau of Statistics, surely investors/speculators cannot take on too much more leverage before things turn sour.
Quoted in USA Today, Warren Buffett summed it up best: “When leverage works, it magnifies your gains. Your spouse thinks you’re clever, and your neighbors get envious,” explained Buffett in his 2010 shareholder letter. “But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people.”
As an aside, at the peak of the GFC household debt levels in the USA reached their pinnacle at slightly over 180% of gross disposable income.
Given our position in the market cycle, the level of household debt and lofty share prices, investors would be wise to avoid the big banks, such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC).
Whilst it’s unlikely they’ll fall flat on their face, forecasts which predict big bank shares will achieve market-beating returns in the next three to five years are hard to justify at today’s prices.
The same runs true for property, mortgage brokers and mortgage insurance stocks.
However if you are bullish on the booming demand for credit, why not take a second look at Veda Group Ltd (ASX: VED)? Veda is a leading credit reporting agency in Australia, having grown its revenues for 20 years consecutively.
Another way to play the rise in demand for credit is through ownership of shares in Automotive Holdings Group Ltd (ASX: AHE) and AP Eagers Ltd (ASX: APE). These automotive retailers are both benefitting from lower interest rates (improving ‘affordability’ of new and used vehicles) and a recent hail storm, which has ‘pulled forward future demand’ according to AP Eagers’ recently upgraded profit guidance.
However if you’re – like me – concerned about the mounting pile of household debt in the Australian market, Credit Corp Group Limited (ASX: CCP) and Collection House Ltd (ASX: CLH) are certainly worth a second look.
Whilst they’re pursuing slightly different growth strategies, both of these debt collection agencies have seen their share prices rocket higher in recent years, as revenues and profits continued to grow. Respectively, they’re up 305% and 192% (before factoring in their dividend payments) over the past five years.
An even better bet for your investment dollars…
Australia’s mounting debt pile will likely get worse before it gets, well, worse. But savvy long-term investors should be conscious of the risks this presents to their future returns.
Indeed house prices won’t go up forever, unemployment will rise, banks’ bad debts are at record lows, and they’ll rise too; and borrowing power does not equal affordability.
I’m clearly on the bearish side of this trend, with the largest position in my family’s share portfolio currently held by Collection House (see my disclosure, below), but there’s multiple opportunities on the local sharemarket for investors willing to bet Australia’s debt levels will continue to grow well into the future.
Where to invest $1,000 right now
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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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