This Indicator Points to Continuing Household Strength

In today’s Money Morning, we’ll try and get a feel for where the economy is at. But first, as another reporting season comes to a close, let’s look at some of the results.

Almost 140 of Australia’s biggest companies from the ASX 200 have reported their full year results. So far…

63% increased their profit over the year; that’s above the long term average. So things may not be as grim as some suggest.

92% of companies elected to pay a dividend. That’s also a record.

Including all companies, profits fell 16.8% over the year. That’s due to a significant distortion imparted by the results from BHP Billiton. To include those results would provide an incorrect picture of the earnings season.

However, excluding BHP Billiton, aggregate profits have lifted by almost 7%.

Looking wider at some of the discretionary spending and housing related stocks we see…

Harvey Norman [ASX:HVN] posted net profit after tax (NPAT) up 30%.  JB Hi-Fi [ASX:JBH] posted NPAT up 11.5%.

Furniture retailer Nick Scali [ASX:NCK] posted NPAT up 53%.

Bathroom retailer Reece Ltd [ASX:REH] posted record sales and profits, NPAT increased by 16.1%

GWA Group [ASX:GWA], a supplier of buildings fixtures and fittings, increased NPAT by 15%

If we look for further signs of discretionary spending in the travel stocks, we find Webjet Ltd [ASX:WEB] delivered record profit growth, with NPAT up 27%.

Likewise Corporate Travel Management Ltd [ASX:CTD] posted record results, NPAT up 60%.

It seems the consumer is voting with his feet.

Property developer Mirvac Group [ASX:MGR] increased statutory net profit by 69%.

Residential property developer Villa World Ltd [ASX:VLW], increased NPAT by 32%.

And on it goes…

Don’t forget, robust housing construction broadly implies a continued run of strong job growth, lifting the broader economy into stronger growth.

One sector of the economy you can use as a barometer of sorts for the economy are Real Estate Investment Trusts. They’ve been arguably the best performing sector for this financial year. Not surprisingly the REITs continue to make higher lows on the charts.

Another barometer you can use to get a feel for the economy are new car sales. The data coming in on that front continues to break records month after month. That doesn’t gel with an economy on the wane.

There’s one more indicator which points to continuing household strength. It’s found in the Commonwealth Banks annual results presentation.

In that report the bank revealed 77% of their home loan customers are ahead on their monthly minimum repayments, by 31 months on average.

It’s worth repeating, the bulk of their home loan portfolio is ahead by two and a half years, it’s an extraordinary figure. It doesn’t suggest housing budgets are stretched to breaking point.

For house prices to collapse we need to see a significant blowout in unemployment. But that’s just not happening.

But you know, if the data from the CBA on its portfolio of mortgages is anything to go by, even if there was a sharp rise in unemployment, almost 80% of their mortgage clients could skip paying their loan for two and a half years and still be ahead of the repayments.

Every analyst gives the reasons why property will collapse. Well here’s one reason why property can still go higher.

It’s most important to know this, because it’s real estate which drives the economic cycle. And while real estate is not stressed, markets are most unlikely to have a major collapse, despite what you may read in the financial press.

This is the advantage knowledge of the real estate cycle gives you. For investing it is the first thing you need to understand.

We may get more market panics, but a major economic collapse is not coming anytime soon.

Rising house prices are driving net wealth higher and consumer confidence along with it, if some of the corporate results are anything to go by.

It all points to continuing housing strength and consumer confidence.

Everything happens within the real estate cycle. Use that cycle, which is distilled into our 18 year real estate clock, to navigate your way through the economy, to trade markets, maximise your property investments and, more importantly, to time it all to your advantage. Get that advantage here.

Regards,

Terence Duffy,
Lead Researcher, Cycles, Trends and Forecasts

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come.


Money Morning Australia