The consumer is still spending – but spending with a credit card
If there’s one chart we want to show you this week it’s this: total outstanding consumer credit card balances, 2008-present. Adjusting for inflation it looks like we’re actually above the 2008/GFC peak. The last few quarters we’ve been writing “the consumer keeps spending” because it’s true; look at Apple’s sales, or the sales at discount retailer TJX. The consumer keeps spending all those COVID savings. Well; now the picture has changed somewhat – the consumer is still spending, but spending on credit. Suggests a couple of things: i) COVID-savings have been depleted and ii) as interest rates have flowed on to mortgage rates, more spend is going on servicing mortgages. The thing with credit is it always comes home to roost — at some point the consumer’s going to be paying interest on their credit cards, and the question you need to ask yourself is what happens to the consumer then? We suggest it means lower sales acorss-the-board and likely higher risk of default. The economic outlook is not rosy. Economic data is only useful viewed in-tandem with other data, so take a look at JP Morgan’s calculation of consumer savings over COVID — and when they run out:
The postman always rings twice and consumer spending, right on cue, has rapidly shifted to credit cards as their savings have run out. The tank is empty and credit – crucially unlike the last few years – costs money. We’re talking double-digit interest rates. What happens when the bank of mum and dad needs to service a mortgage at 6.5% and a credit card at 18%?
Australian Banks
APRA (Australian Prudential Regulation Authority) which overlooks the Australian Banking system, stated that Australian depositors are in a better position than US, as Australian banks hold more capital and that the banking system can handle a situation where house prices were to fall -43% and unemployment rises to 11%, under their stress test modelling. This situation would put pressure on bank shareholders with periods of no-dividend payouts in this extreme scenario.
Additional funding costs and other headwinds saw UBS lower their target price and downgrade bank stocks on expectations of increasing bad debts and fierce competition.
| 12-Month Price Target | Rating | |
| NAB | A$25.00 | Sell |
| Westpac | A$22.50 | Neutral |
| ANZ | A$25.00 | Buy |
| CBA | A$100.00 | Neutral |
| Macquarie | A$211.00 | Buy |
| Bank of Queensland | A$6.00 | Sell |
| Bendigo and Adelaide | A$8.00 | Sell |
Whilst appearing bleak, there is a strong “BUY” argument for Macquarie which is more diversified from the mortgage market than its banking peers and has the ability to profit in volatile markets, with its market facing businesses. Westpac and ANZ did have their target price cut but at current levels still represent modest upside from current levels, and from a bearish broker it provides support in a fraught market. We remain BUY rated across these three banks (Westpac, ANZ and Macquarie).
Oil
We made a bullish call on oil a couple of weeks ago at a time where oil was i) sold off and ii) people thought that oil was moving down to $60-per-barrel. Now OPEC+ has made a million barrel cut which has shot the price of crude up to +$80 per barrel. Regardless oil is going to be more in demand than ever as China and India continue to compete. Our way of gaining access to oil is Occidental Petroleum (read our report here) because the company trades at quite low multiples and management has paid down the debt that once made the company a pariah (it helps that Warren Buffett’s Berkshire is the biggest shareholder). Continue to be buy rated on OXY — OPEC+’s cuts are a nice catalyst here which should see all oil companies benefit well from this.
