The ASX stocks exposed to a constrained consumer

Unless you’ve managed to cut yourself off from all forms of news (in which case, please send directions to your cave) you’ll no doubt be aware of the extensive coverage of Australia’s cost-of-living crisis.

But what has seemed largely absent, to me at least, is deeper economic analysis through an investment lens.

This is not to minimise the pressure facing households. The effects are real, and for many Australians they are severe. But the crisis also has consequences for companies, sectors and portfolios, and investors cannot afford to ignore them.

To help frame the issue, I spoke with Isaac Poole, Chief Investment Officer at Ascalon Capital. Poole brings both a market practitioner’s perspective and deep economic background, including a PhD in economics from the University of Sydney.

An end to the crisis could take years

While he accepts that the narrative of a cost-of-living crisis is very real, he also points out that it doesn’t affect all households equally.

“When you break down the inflation numbers and look at things like bread, milk, eggs, insurance, healthcare and childcare, those sorts of things are up around 50% cumulatively over the past five years. You have this K-shaped economy. Some households are doing very well because their wealth has gone up so much, while others are very much experiencing the cost-of-living crisis.”

That distinction matters for investors – the economy can look stronger from the perspective of asset owners, whose portfolios and property values may have risen, while still feeling much weaker for households relying primarily on wages. In other words, the cost-of-living crisis is not evenly distributed, and neither are its market implications.

The more difficult question is what it would take for the crisis to end.

“At a headline level, getting inflation below wages, so households are getting real wage growth, would almost by definition be the end of a cost-of-living crisis. But the way it ends matters…. If it is driven by productivity gains that allow wages to move up and economic growth to pick up without inflation increasing, that is a really positive outcome. If it is wage growth without productivity gains, that is not such a great way to end it.”

The problem is that inflation measures the rate at which prices are rising. It does not tell us whether households have recovered from the price increases that have already occurred. If prices are now permanently higher, the repair mechanism has to come through sustained real income growth, lower interest costs, tax relief, or some combination of the three.

“The cumulative increase in price levels is materially higher than the cumulative increase in wages. And it’s not like we’re going to get deflation.”

That means the end of the cost-of-living crisis may not arrive as a single turning point. For investors, that suggests the more useful question is not simply when inflation returns to target, but how long households remain constrained, and which companies are most exposed to that constraint.

Why investors need to focus on the consumer

For investors, the danger is relying too heavily on aggregate measures such as GDP growth. An economy can be expanding while the household-facing parts of it remain under pressure, particularly if growth is being supported by capital expenditure rather than consumer strength.

“We could be in a period where economic growth looks okay, but inflation remains sticky and households actually feel quite a lot of pain,” Poole says.

The same logic applies to inflation. A lower CPI print may be welcome, but it does not automatically mean the consumer is healthy.

“Retail sales, consumer spending in GDP and house prices matter. We spend quite a lot of time thinking about the consumer from that perspective.”

Investors may therefore need to watch a broader dashboard: real wages, retail volumes, household savings, arrears, credit growth, house prices, consumer sentiment and services inflation. The question is not simply whether inflation is falling, but whether households are rebuilding purchasing power or merely adjusting to a higher cost base.

Exposed stocks and potential beneficiaries

To test the market implications, I ran two simple ASX screens. The first looked for companies that may be more exposed to a constrained consumer, including those with weaker sales expectations, poor earnings momentum, housing exposure, consumer credit risk or reliance on discretionary spending. The second looked for companies that may be better placed, including those with defensive demand, real-asset exposure, stronger balance sheets or earnings streams less directly tied to household spending.

The lists are not recommendations. They are Livewire screens, not Ascalon Capital research, and should be treated as candidates for further work rather than conclusions.

Stocks that may be exposed to a constrained consumer

The first group includes companies that may face pressure if households keep trading down, deferring purchases, borrowing less or becoming more cautious.

“We’ve been worried around consumer discretionary for some time,” Poole says. “It has struggled, understandably, and may continue to do so.”

The pressure may also extend beyond obvious discretionary names. Poole says consumer credit is another area to watch.

“As consumers tighten their belts or feel pain, they’re less likely to borrow, and the quality of their credit deteriorates as well. So there are some risks there.”

Discretionary spending

ASX: DMP, ASX: ARB, ASX: GYG

Discretionary spending is often among the first areas to be reduced or cut, putting pressure on companies exposed to takeaway food and lifestyle purchases.

While GYG has strong forecast growth, it carries a premium price and could fall significantly if earnings expectations are not met. See Domino’s fall from ~$165 to ~$16 over the last five years for an example. Its recent exit from the US puts more focus on the Australian consumer and damages a key part of the narrative justifying the premium valuation.

Consumer travel

ASX: WJL, ASX: AIZ, ASX: QAN, ASX: VGN 

Holidays are a big-ticket item and like takeaway food, often among the first areas of spending to be cut. If oil prices rise again due to re-escalation in Middle East tensions, this could place further pressure on both costs and volumes.

Housing and renovation

ASX: FBU, ASX: REH 

Rates and weak confidence can hit construction, renovation, and housing turnover. Both companies have seen declining earnings and carry significant debt loads. FBU is not primarily a residential developer, but its materials and distribution businesses remain tied to the construction cycle. REH is similarly exposed to housing and renovation activity.

Auto

ASX: BAP 

Consumers may delay car upgrades, accessories and even non-essential maintenance when budgets are tight. BAP has already fallen heavily, so the risk is partly reflected in the price, but any turnaround still depends on sales stabilising and margins improving.

Consumer credit

ASX: HUM, ASX: LFS 

Credit demand and credit quality may deteriorate in a tighter economy. HUM also faces governance concerns over the recently abandoned takeover bid from Credit Corp.

Advertising/media

ASX: NEC 

Advertising tends to follow corporate confidence and consumer demand. NEC also carries execution risk following the sale of its radio and regional broadcast networks and acquisition of QMS.

Stocks that may hold up or benefit

The second group is more varied. Some names have defensive or inflation-linked characteristics, some are tied to real assets or commodities, and others may benefit from second-order effects of household stress.

Defensive and inflation-linked real assets

ASX: CLW, ASX: CQR, ASX: DGT 

These REITs all have resilient customer bases, and in the case of CLW and CQR, tend to hold long lease agreements with tenants. DGT is also exposed to a growth area of the economy – data centres.

Agriculture and commodities

ASX: MIN, ASX: CIA, ASX: YAL, ASX: CBO, ASX: RIC 

These companies are not direct beneficiaries of household pressure, but their earnings are driven more by commodity prices, production, global demand, etc. than by Australian discretionary spending.

Stress beneficiaries

ASX: CCP 

An interesting counterexample which may do well if consumers struggle, despite being exposed to consumer credit. A rise in delinquencies could increase the supply of debt ledgers available to buy. The risk is that this only works if stress remains manageable: a weak consumer may help volumes, while a deep recession could hurt collections.

Small treats and trade-down winners

Poole also notes that small indulgences can survive a downturn, although they are hard to identify in advance.

“Maybe it was lipstick during the GFC, maybe it’s candles this time, or during the pandemic it was Netflix,” he says. 

The broader point is that consumers may not stop spending altogether. They change what they buy, what they defer and what they trade down to.

Conclusion

The years ahead probably won’t look like the period we’ve just had. Since March 2020, equity markets around the world have almost continuously marched higher. The future doesn’t look as bright, but there could still be some areas that are relatively well sheltered, at least.

As Poole puts it: “This feels like a time when you probably want to be more defensive in your equity allocations. But that doesn’t mean you’re going to get positive returns.”