A report from accounting giant PricewaterhouseCoopers ('PwC'), published in Fairfax media this morning, found that more than one third of Australia is in recession, with just a few locations generating most of our wealth.
The what:
A total of 10 locations (of 2,214 nationally) produce nearly 20% of national income, led by Melbourne and Sydney CBDs, and iron ore mining in the Pilbara region of Western Australia.
So what?
Combine that fact with slowing national growth and poor consumer confidence, and the findings have profound implications for Australians investing domestically.
On one hand, the economy is becoming ever more concentrated, and on the other the appeal for companies to invest domestically is falling.
Businesses exposed to consumer discretionary spending could expect to be the worst affected. Harvey Norman Holdings Limited (ASX: HVN) and JB-HiFi Limited (ASX: JBH) have relatively high, fixed costs as a result of their store network and a reduction in customer numbers and expenditure will crunch margins and profits.
Even if Australia avoids a full-blown recession, reduced growth will make competition between consumer discretionary and furniture stores like the above and Nick Scali Limited (ASX: NCK) more cut-throat and will reduce the incentive and increase the risk of investing in new stores.
Other companies like property moguls Scentre Group Ltd (ASX: SCG) and Stockland Corporation Ltd (ASX: SGP) are worth watching because of their exposure to a slowdown through their retailer tenants. Scentre Group owns premium assets in major growth areas and is less of a risk, while Stockland and others invest more in slowing regional areas that are exposed to industries like mining and agriculture.
Increased concentration is also a major concern because even growth industries like finance face risks, with industry players moving to slow investor lending growth, and booming asset prices and plummeting bad debts raising the spectre of a wide-spread economic slowdown at some point.
Now what?
Investors with large holdings in consumer discretionary stocks and the big four banks like Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd. (ASX: NAB), and Westpac Banking Corp (ASX: WBC) should check to make sure that they're not over-exposed to slowing sectors of the economy.
The interconnected nature of Australian business means that a slowdown in one area like finance can have a follow-through effect on other sectors and a correspondingly greater impact on your portfolio.
Viable alternatives to risky sectors can include stocks with overseas earnings growth like Westfield Corp Ltd (ASX: WFD) and Coca-Cola Amatil Ltd (ASX: CCL) – which incidentally looks great value at the moment – and other growth sectors like online-based businesses. I currently have 25% of my portfolio invested in tech stocks, and it is a sector that more investors should consider owning.
