Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

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Thematic (Sector/Industry)

<div class="content-highlight"><h2>Opportunities could present if the market loses its cool.</h2></div><hr><h2>An Australian Recession is Improbable, But Not Out of the Question</h2><p>Yes, we've dropped the R-word. A much-mooted concern of investors in the Australian retail sector is the potential of a more pronounced decline in consumer spending on account of the weak housing market or perhaps even a more widespread slowdown in economic activity, such as a recession. Australians have been dodging the bullet for a record-breaking 106 quarters but at some point, this lucky streak must come to an end. We avoid the futile exercise of predicting the timing of the next Australian recession and we aren't forecasting a cyclical decline in our base case. As Nobel Prize laureate Paul Samuelson famously put it: "The stock market has predicted nine of the past five recessions." However, we have travelled back in time to jog our memory on how the last Australian recession impacted the retail sector. We've run two scenarios, examining the performance of 10 Australian retail chains during the early 1990s, as case studies to understand how a similar downturn might pan out for retailers today. We analysed sales and EBIT data from fiscal 1990, the eve of Australia's last recession, to fiscal 1993, when we judge most of the associated ripple effects had dissipated.</p><hr><h2>Key Takeaways</h2><ul>
<li>We don't expect retailers to be faced with a recession anytime soon. There are some clouds gathering— real income is declining and building approvals are weak—but offsetting factors are low unemployment and correspondingly high consumer confidence. We quantify the risk of a recession at less than 25%. Neither the IMF, OECD, nor Westpac are forecasting a near-term decline in Australia's GDP.</li>
<li>Consumer staples have a reputation to be defensive investments for a reason. <a href="https://www.smartkarma.com/entities/500" target="_blank" data-smartkarma-citation="entities:500:1">Woolworths Ltd (WOW AU)</a> and <a href="https://www.smartkarma.com/entities/27799" target="_blank" data-smartkarma-citation="entities:27799:1">Coles Group Ltd (COL AU)</a> could even benefit from consumers shifting more spending towards groceries, as they did in fiscal years 1989 to 1993. However, the appeal of Aldi's discount offering could steal the show.</li>
<li>
<a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a>'s earnings from its Bunnings hardware business aren't defensive. Out of four categories examined, the EBIT margins of the hardware peer group were impacted the most by the recession. However, our intrinsic values are unlikely to be materially impacted.</li>
<li>A sell-off in retailing stocks due to cyclical earnings weakness could provide opportunities to long-term, fundamental investors. But beware of weak balance sheets such as <a href="https://www.smartkarma.com/entities/577" target="_blank" data-smartkarma-citation="entities:577:1">Myer Holdings (MYR AU)</a>.</li>
</ul>

Opportunities could present if the market loses its cool.An Australian Recession is Improbable, But Not Out of the QuestionYes, we've dropped the R-word. A much-mooted concern of investors in the Australian retail sector is the potential of a more pronounced decline in consumer spending on account of the weak housing market or perhaps even a more widespread slowdown in economic activity, such as a recession. Australians have been dodging the bullet for a record-breaking 106 quarters but at some point, this lucky streak must come to an end. We avoid the futile exercise of predicting the timing of the next Australian recession and we aren't forecasting a cyclical decline in our base case. As Nobel Prize laureate Paul Samuelson famously put it: "The stock market has predicted nine of the past five recessions." However, we have travelled back in time to jog our memory on how the last Australian recession impacted the retail sector. We've run two scenarios, examining the performance of 10 Australian retail chains during the early 1990s, as case studies to understand how a similar downturn might pan out for retailers today. We analysed sales and EBIT data from fiscal 1990, the eve of Australia's last recession, to fiscal 1993, when we judge most of the associated ripple effects had dissipated.Key Takeaways
We don't expect retailers to be faced with a recession anytime soon. There are some clouds gathering— real income is declining and building approvals are weak—but offsetting factors are low unemployment and correspondingly high consumer confidence. We quantify the risk of a recession at less than 25%. Neither the IMF, OECD, nor Westpac are forecasting a near-term decline in Australia's GDP.
Consumer staples have a reputation to be defensive investments for a reason. Woolworths Ltd (WOW AU) and Coles Group Ltd (COL AU) could even benefit from consumers shifting more spending towards groceries, as they did in fiscal years 1989 to 1993. However, the appeal of Aldi's discount offering could steal the show.

Wesfarmers Ltd (WES AU)'s earnings from its Bunnings hardware business aren't defensive. Out of four categories examined, the EBIT margins of the hardware peer group were impacted the most by the recession. However, our intrinsic values are unlikely to be materially impacted.
A sell-off in retailing stocks due to cyclical earnings weakness could provide opportunities to long-term, fundamental investors. But beware of weak balance sheets such as Myer Holdings (MYR AU).


The Morningstar Time Machine Revisits Australia's Last Recession