Don't be fooled by the sudden rise in the stockmarket. The results of the latest Westpac-Melbourne Institute sentiment index (a measure of consumer confidence) are in and as usual, they indicate that nationally the pessimists still outweigh the optimists.
Consumer sentiment is measured on a numeric scale, with values above 100 indicating people are more optimistic, while values below 100 indicate pessimism.
15 of the past 17 monthly surveys have come in under 100 and it is safe to say that an attitude of pessimism pervades the economy – indeed, that is why Reserve Bank of Australia governor Glenn Stevens keeps banging on about restoring confidence.
As a point of fact, June's result of 92.3 is barely above levels reached during the depths of the GFC.
For stockmarket investors, consumer confidence is often treated as little more than a side-show – if that – but it has a pervasive and powerful effect on a number of stocks which should not be underestimated.
For example, low consumer confidence in financial security generally motivates 'saving' behaviour, which has a direct impact on profits at businesses like Commonwealth Bank of Australia (ASX: CBA) which draws part of its revenue from credit cards and personal loans.
On the other hand, paying down debt and saving more increases the ability of banks to self-fund from deposits, which can increase their Net Interest Margins and result in them becoming more profitable overall.
Unfortunately, for retailers like JB Hi-Fi Limited (ASX: JBH) and Myer Holdings Ltd (ASX: MYR) the effect is simply negative because it directly translates into fewer sales. JB Hi-Fi and others like Harvey Norman Holdings Limited (ASX: HVN) have been somewhat insulated from weak sentiment because of government measures to stimulate small businesses, but they could still suffer in the future.
Over the longer term the outlook for consumer confidence is even more interesting. It seems to be generally accepted that Australians in the next five years can expect substantially slower growth in wages and their material wealth compared to the previous five years.
Even without bringing the dreaded 'recession' word into the equation I believe that consumer appetite for debt and spending will remain subdued, particularly if we have a collapse in housing prices in the major cities as many are predicting.
With this in mind, one thing every investor should do before buying a stock is ask themselves:
"Would or do I use the services this company offers? If my financial situation worsened, would this still be the case?"
That raises some interesting questions for a variety of companies, including G8 Education Ltd (ASX: GEM) and Affinity Education Group Ltd (ASX: AFJ). Childcare is an expensive service and while it is arguably defensive because it is a necessity and the government is making it more affordable, I have a big question mark over the appeal of the business if wage growth slowed.
Research shows that weaker currencies are no barrier to Aussies traveling overseas, but I suspect weaker consumer sentiment and wages growth will have an impact on Flight Centre Travel Group Ltd (ASX: FLT) over the next two to three years.
Weak consumer sentiment isn't a reason not to invest per se, but it is a warning sign for any company leveraged to consumer sentiment, wages growth and discretionary income if those stocks are trading at very high levels – as is the case with companies like JB Hi-Fi and Harvey Norman.
