(Bloomberg) -- Investors are snapping up Australian stocks geared to the nation’s cashed-up retirees while shunning firms exposed to younger households, in a play on a widening intergenerational wealth divide.
Money managers like Shawn Lee at SG Hiscock & Co. are tapping the “economic bifurcation” theme by investing in Flight Centre Travel Group Ltd. and Treasury Wine Estates Ltd. that benefit from lifestyle spending by older Australians.
At the same time, they’re shying away from “battler stocks” such as car dealership Eagers Automotive Ltd., KFC store operator Collins Foods Ltd. and childcare operator G8 Education Ltd. that are bearing the brunt of a cost of living squeeze on younger Australians.
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Baby boomers have ridden a wave of prosperity that’s smsgs een the value of their often mortgage-free homes soar and income from bank deposits climb due to elevated interest rates. In contrast, younger households are paring spending to meet repayments on hefty mortgages at a time of stubbornly strong inflation.
That’s complicated the Reserve Bank of Australia’s job given it only has a single blunt instrument — the cash rate — that’s designed for the aggregate in the economy.
“With the cash rate having increased by 425 basis points the focus has largely been on households’ mortgage payments but not their interest receipts,” said Jonathan Kearns, chief economist at Challenger Ltd. He notes that only 40% of households have a mortgage and for many of them the repayments involved aren’t a big share of income.
“Boomer retirees with bank deposits have benefited from higher interest rates, enabling them to maintain or even increase their spending,” said Kearns, previously a senior official at the RBA.
The RBA raised rates rapidly between May 2022 and November 2023 to try to quell inflation, yet the economy is proving resilient with unemployment still low at 4.2%. That helps explain why Governor Michele Bullock is maintaining a hawkish tone at a time when much of the rest of the world is easing policy.
The RBA’s tight monetary settings are having an outsized impact on the younger cohort, who are also typically on lower salaries and have fewer savings. Goldman Sachs Group Inc. research shows Australia’s “millennial” households — those headed by people aged 29-43 years — have experienced the largest decline in real average disposable incomes over the past two years.
In contrast, boomers — aged 59-78 — have benefited from increased interest receipts. Millennials and boomers constitute the two biggest demographic groups in Australia.
“Higher income or retired boomers have yet to compromise on lifestyle,” said SG Hiscock’s Lee, pointing to Flight Centre’s luxury travel business that he says is “flying.”
For Treasury Wine, which has 13 buy recommendations and no sell calls, earnings in the year-ended June were boosted by “strong luxury portfolio growth in Penfolds,” according to an exchange filing, with the brand reporting an almost 16% increase in earnings year on year. China’s lifting of tariffs on Australian wine also boosted the firm.
Australia’s silver economy is only set to swell further given the latest intergenerational report predicted the number of people aged 65 and over will more than double in the next 40 years.
“Left in the middle are the mortgage belt class who are clearly being squeezed,” said Richard Schellbach, Sydney-based analyst at UBS Group AG. They’re the reason why retailers are seeing solid growth in cheaper discretionary items, he noted.
Conglomerate Wesfarmers Ltd. said in its August earnings statement that its low-cost subsidiary K-mart was a standout performer as “households increasingly shifted to value.”
Meanwhile, Eagers Automotive is seeing rising order cancellations for new cars and G8 has lower occupancy at its childcare centers as households hunker down.
Economists and analysts expect government tax cuts that began July 1 and potential rate cuts in 2025 to support a rebound in incomes across younger and middle-aged households.
Jun Bei Liu, portfolio manager at Sydney-based Tribeca Alpha Plus Fund, which manages about A$1.5 billion ($1 billion) and holds Treasury and Flight Centre shares, said the outlook for consumers is likely to improve in coming months.
So far though Australians are saving, not spending, the government’s extra cash. Growth in household spending was flat in August after falling 0.5% in July. The RBA, in minutes of its last policy meeting, said there’s a risk that a predicted recovery in consumption could take longer.
“With interest rates set to fall over the coming 12 months, the financial squeeze on the mortgage belt consumer will ease, but not by much,” said UBS’s Schellbach. He points to a strong jobs market and rising asset prices as factors that have cushioned consumers.
“If either of these two foundations were to crack, the consumer picture would rapidly deteriorate.”
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