Australia | 2:03 PM
Australian consumers are proving surprisingly resilient, but analysts warn higher rates, falling house prices and rising costs could increasingly test discretionary spending through FY27.
- Consumers stay resilient as economic headwinds intensify
- Analysts at Morgan Stanley worry about the two years ahead
- Impact of falling house prices/AI capex boom
- Preferred sector exposures
By Mark Woodruff
2026 thus far has not been the ideal hunting ground for investors wanting to have exposure to ASX-listed consumer discretionary companies.
Shifts in interest-rate expectations and tax changes announced in the May federal budget have subjected the sector to significant multiple compression and the recent August reporting season has only made things worse.
While absolute valuation risk has reduced, Morgan Stanley does not consider discretionary stocks "cheap" given the potential for further earnings downgrades and limited earnings growth support.
Economists at CommBank recently reported weekly card spending data pointed to a broad-based slowdown in household spending in recent weeks, albeit with the added observation that the data remain choppy and seasonal.
Countering such a dim view for the sector overall is UBS’s latest proprietary Australian survey showing a surprisingly resilient consumer.
According to that survey, spending intentions strengthened in the September quarter, remaining near record levels, supported by household income growth, while income expectations also remained close to record highs.
Households expect strong income growth to support both increased spending and saving.
UBS forecasts real consumption growth will slow towards 1% year-on-year rather than collapse and continues to forecast two further 25bps RBA rate hikes, taking the cash rate to 4.85%.
The survey highlights cost-of-living pressures continue to rise, with spending increasingly directed towards essentials such as groceries, fuel and utilities.
Accordingly, your average Australian battler remains on the look-out for cheaper alternatives --value for each dollar spent, if you like-- with consumers favouring lower-priced retailers and brands including Bunnings and Kmart under the Wesfarmers ((WES)) umbrella, Guzman y Gomez ((GYG)), Lovisa Holdings ((LOV)) and Chemist Warehouse, part of Sigma Healthcare ((SIG)).
Morgan Stanley concurs consumers are becoming increasingly selective and promotion-driven, favouring value, replacement purchases and spending around promotional periods.
This broker maintains its relative preference for stocks within the Consumer Staples sector over Consumer Discretionary given its own expectation higher interest rates, falling house prices, rising fuel costs and weak consumer confidence will likely pressure household cash flows and discretionary spending through FY27.
Thus far, UBS’s survey is suggesting spending intentions increased quarter-on-quarter to the second-highest level recorded by the series.
Intentions improved among higher- and lower-income households but weakened for middle-income earners, reflecting differences in income, savings and debt trends, the analysts explain.
Spending intentions remained positive across almost all categories, particularly essentials, while fuel recorded the strongest year-on-year increase as cost-of-living pressures intensified.
The survey also highlighted consumers are increasingly concentrating expenditure around major events and promotional periods, making execution during these periods more important for retailers.
Supermarkets continue to benefit from consumers eating more meals at home, while quick-service restaurants are proving another beneficiary of the trend towards trading down.
UBS observes the Health and Beauty sector remains structurally attractive, while Electronics face inflation-driven bargain hunting and housing-related categories remain pressured by weaker housing turnover and falling house prices.
Impact of falling house prices
UBS' survey also shows the federal budget’s tax changes have reduced intentions among both owner-occupiers and investors to purchase residential property.
House price growth expectations have fallen to just 1.8%, the weakest reading in the survey’s history.
Consumers expect mortgage rates to rise by around 81bps over the next year, down from 116bps in the previous survey, with around half expecting higher rates to reduce their spending.
Family financial assistance is becoming increasingly important, with a record 22% of respondents providing support to relatives, primarily for living expenses, housing purchases and debt repayment.
This week’s 2026 Mortgage Broker Survey by Macquarie highlights borrowing capacity as an increasingly important consideration for homebuyers as higher interest rates and tax changes constrain serviceability.
Around 80% of brokers have experienced a decline in investor enquiries since the federal budget, while 75% report investors are delaying or cancelling property purchases.
Macquarie remains constructive on Wesfarmers despite the conglomerate's exposure to the housing cycle, highlighting resilient demand and continued strong execution at Bunnings and Kmart.
Harvey Norman ((HVN)) is the broker’s least preferred exposure, with furniture and homewares demand expected to remain challenged by weak housing turnover and subdued consumer appetite for major household purchases.
AI capex boom consequences for electronic goods
During the recent reporting season, Macquarie identified two related themes across electronics retailers: “hyperinflation” in categories that historically experienced only modest annual price increases, and widespread product shortages as supply chains struggled to meet demand.
The AI capex boom has driven exponential growth in memory demand, the broker explains, resulting in higher prices and product shortages across consumer electronics.
Improving electronics fundamentals are seen as a matter of “when, not if”, with JB Hi-Fi ((JBH)) considered best positioned as the retailer continues to execute around major product launches, subject to availability.
While consensus forecasts a progressive recovery for JB Hi-Fi, Morgan Stanley remains more cautious, highlighting a sharp deterioration in sales momentum through the second half of FY26.
JB Hi-Fi Australia’s like-for-like sales growth slowed to a negative -0.8% in the fourth quarter from 2.6% growth in the third quarter, while The Good Guys slowed to flat from 2.5%.
Both numbers have weakened further early in FY27 to -1.4% and -1.7%, respectively.
Morgan Stanley forecasts nil like-for-like growth in FY27 for JB Hi-Fi Australia and -0.5% for The Good Guys, versus consensus at 0.8% and 0.2%, respectively.
Ongoing pressure from memory-driven average selling price inflation, product availability and promotional intensity, underpins this broker’s forecast for a -50bps decline in JB Hi-Fi Australia’s FY27 earnings (EBIT) margin, compared with consensus at -25bps.
The Good Guys’ gross margin proved resilient in FY26, rising 30bps year-on-year due to favourable product mix, yet the lagged impact of the housing downturn is expected to weigh on FY27 earnings margins, with Morgan Stanley forecasting a -70bps decline versus consensus at -50bps.
While the high inventory turnover may have resulted in shortages emerging sooner than for peers, Macquarie expects availability to normalise as competitors sell through existing inventory.
Rising memory costs have created an unusual environment, Macquarie observes, with manufacturers increasing prices on already-released products rather than waiting for next-generation launches.
As a result of these pressures, it’s noted gaming products have experienced the largest Australian price increases at around 22%, while laptops, PCs and tablets have recorded similarly substantial rises.
Elsewhere, Macquarie explains phone pricing has so far been less affected, reflecting the category’s more regular product-release cycle.
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