The cost of living crisis: Have markets over-rated the impact it will have on stocks?

Cost of living crisis? What Cost of living crisis?

For the last year, interest rates and inflation have increased at the fastest pace in multiple decades.  Investors have sold off several stocks, particularly consumer discretionary stocks, over fears they will be hit by inflation even when they are not. Granted, some stocks have been hit, with Baby Bunting (ASX:BBN) being arguably the most famous example.

Is the cost of living crisis just all over hyped?

 

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The worst of the cost of living crisis is still to come

You may be forgiven for thinking the worst of the cost of living crisis is over. Sure, consumer confidence is low, but inflation appears to have peaked. If central banks truly feared a major deflationary event, they would have stopped hiking interest rates by now.

And if you look at the example of Baby Bunting (ASX:BBN), it’s not that people stopped buying particular goods (in this company’s case baby goods) – its just that they went for cheaper stores stores (such as Big W, K-Mart and Target) or for second-hand prams on Gumtree.

Other stocks have been lucky despite the cost of living crisis and look set to record solid FY23 results. Universal Store (ASX:UNI), one of the easiest picks to be vulnerable to inflation given it is a youth-focused fashion outlet, told shareholders to expects 24-25% revenue growth and 20-26% EBIT growth – notwithstanding it will be inflated by the first half of the year and may go backwards in FY24.

 

The mortgage pain may not be over

But consumer confidence surveys show consumers are pessimistic about the future. Arguably, consumers believed there would be some relief in the federal budget. But it’s not coming for another 12 months (in the form of the Stage 3 tax cuts) and there’s a case to be made that it’ll do little more than slightly reduce bracket creep as opposed to stimulating consumer demand.

In fact, the 2023-24 could well be tough for taxpaying consumers with the elimination of the Low to Middle Income Tax Offset.

And there are still a high proportion of fixed-rate mortgages set to roll onto fixed rates, leading to higher repayments and thus less money to spend elsewhere. The RBA’s analysis estimates a total of 880,000 fixed rate loan facilities will roll over in 2023 and another 450,000 in 2024. There’s still a long way to go.

 

But that doesn’t mean all stocks will be impacted

Ultimately, not all companies will be hit by the cost of living crisis. The key is to look for companies with a dominant market position that provide a good or service that cannot be put off. There are plenty of examples, such as Reliance Worldwide (ASX:RWC), which provides parts for emergency plumbing works, laser clinic operator and takeover target Silk Laser (ASX:SLA) as well as market favourites Xero (ASX:XRO) and CSL (ASX:CSL).

 

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