Last month's ASX reporting season was "a mixed bag" — but one massive trend was clear to everyone.
That's according to Wilsons equity strategist Rob Crookston, who is in no doubt that ten consecutive months of interest rate rises is causing immense pain for Australians.
"Reporting season provided further evidence that consumers are paring back their expenditure on discretionary goods and big-ticket items, as pulled-forward demand from COVID unwinds and cost of living pressures eat into household budgets," he said in a memo to clients.
Crookston noted how sales have fallen for many retailers, compared to a year earlier.
This is starting to cause a pile-up in warehouses, which can trigger multiple negative effects.
"The moderating consumer demand backdrop has driven a rise in inventory levels for some names," he said.
"Not only is sitting on elevated inventories often a forward indicator of softening demand, it can also create additional costs (e.g. warehousing) while it weighs on free cash flows and increases the risk of product obsolescence, which can necessitate an increase in promotional activity to clear stock."
The tightening of wallets is even impacting businesses that sell essential goods.
"There has also been increasing commentary that consumers are 'trading down', with Woolworths Group Ltd (ASX: WOW) CEO Brad Banducci saying consumers were eating more at home rather than dining out, for example."
The stocks to avoid and one to buy right now
So what does this mean for ASX share investors?
The most straightforward tip from Crookston is to avoid buying into the sectors that are directly hurt by a decline in shoppers.
"The focus portfolio has no exposure to the retail or consumer goods sectors, which we think are close to peak (cyclical) earnings."
However, there is an opportunity to buy ASX shares of businesses that provide consumer services.
These companies are "continuing to benefit from the shift of spending from goods to services and have attractive long-term earnings growth potential".
Crookston's top buy in this category is Lottery Corporation Ltd (ASX: TLC), which boasts "predictable, infrastructure-like cash flows that are underpinned by its long-dated licences".
"The Lottery Corporation had a stellar 1H23 result, which included EBITDA growth of +15.8% as lottery sales were resilient," he said.
"At the same time, margins benefitted from an increasing penetration of the digital channel."
The great tailwind for the company is the "defensive nature of lottery demand", which has shown resilience in the past through tough economic conditions.
