Investors in the local share market should be on high alert for signs of risks creeping into their portfolios as mortgage stresses may start mounting on younger families into next year, says Dermot Ryan, AMP Capital’s Equity Income Fund Co-Portfolio Manager.
No sooner have we seen slight mortgage increases from the banks do we see a swath of profit downgrades from listed companies who sell to young families, Ryan notes.
Recent trading updates by ASX-listed retailers have seen share prices fall and this could be a sign of things to come as the purse strings of some mortgagees continues to tighten, Ryan says, basing his views on analysis of the data relating to disposable income of households with high debt to income ratio levels.
“We’re on alert for areas where we think risks we’re seeing reflected in the banking data could come through,” Ryan says, pointing to stats from the Reserve Bank of Australia.
“There’s almost 20 per cent of households who have recently taken out mortgages which have less than $200 in the bank after paying all their outgoings,” he says.
He notes the 35 to 44 year old groups are the most vulnerable given their high household debt-to-income ratios.
Negative trading updates by the likes of Baby Bunting, G8 Education, Asaleo and Monash IVF in recent weeks as well as warnings from retailer Myer this year are in part reflective of the pain being felt by households with significant mortgage debt, Ryan believes.
There are almost 10 per cent of households in Australia with debt to income ratios above 500 per cent, Ryan points out.
"This has already started playing out in the share market with downgrades and profit warnings, I’d be watching closely into next year companies targeting these segments as mortgage stresses for these groups continue to play out.”
While the Reserve Bank of Australia isn’t expected to raise interest rates any time soon – certainly not in the first half of next year – the Australian Prudential Regulation Authority’s crackdown on certain types of lending is likely to result in the more over-levered households feeling the pinch, further curtailing discretionary and lifestyle-related spending.
“The knock on effect from this will flow through to the share market and we’re certainly already seeing signs of it. Investors should thinking carefully about the exposure they’re carrying in their portfolios stemming from some of these risks,” Ryan highlights.
Ryan believes the hefty weight of mortgage payments have not impacted retail sales to the extent he ultimately expects they will.
Mortgage customers moving from an interest-only mortgage to a principle-and-interest mortgage could end up experiencing a 40 per cent increase in monthly repayments, Ryan explains, and this may make a dent into retail sales.
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