Misery

– David Wanis, March 2026

Since early this year we have been observing pressure on our Australian consumer thesis which underpins a few portfolio positions in high quality consumer facing companies. Following results in February and the rapid change in conditions following the events in the Middle East we now see risk of significant deterioration to the condition of the Australian consumer similar to what we saw three to four years ago.

Sticky inflation, not helped by public sector wage growth, declining productivity and rising commodity prices, had reversed the direction of interest rates by November 2025, but consumer confidence, asset prices and spending held up with average small cap retail like-for-like spending accelerating from +3.5% in the June half to +5.2% in the December half. Results in February however showed early signs this was slowing, and although we have not had any meaningful trading updates since then, all the leading indicators are now pointing to a sharp slowdown.

We have seen this movie before – only a few years ago in fact – and this time it maybe even worse. One thing history tells us about LFL sales growth is it can change fast.

The Misery Index is a data-based measure of how consumers are likely to feel about their financial condition. It combines inflation, unemployment and in our case interest rates and tracks this over time. The theory being that if inflation is low, interest rates are low and unemployment is low, consumers feel pretty good about things. Once these rise – and worse of all should they rise together (stagflation) – the consumer feels miserable. This feeling also shows up in survey-based measures.

Source: Longwave, Company Reports, Bloomberg.

Misery Index components are currently all going the wrong way. Inflation never got under control, now spiking again and not offset by GDP per capita growth. Interest rates are rising sharply, hitting the most levered consumers and homeowners hardest. Unemployment has only just ticked up and probably understates the anxiety in the employment market regarding the potential for AI job losses in the near future.

ANZ Roy Morgan and Westpac Melbourne Institute capture all of this in real time via surveys, and on the latest results, the misery is being felt, and consumer confidence has collapsed. Whatever our subjective feeling about how negative these effects are today vs 2022, objectively they are worse – with greater misery and much lower surveyed confidence.

With interest rates rising and GDP potentially slowing, categories of stocks which are most exposed to this deterioration include:

• Unprofitable or Cashflow negative businesses. These companies are “default dead”, relying on the “kindness of strangers”, a.k.a equity capital markets to continue raising capital to fund the dream of future profitability,
• High multiple / thematic / crowded positions are also more at risk as investors become more cautious on paying up for a less certain future. Witness the change of fortunes for SaaS technology stocks in the past few months for a recent example,

• Over leveraged companies in a rapidly rising interest rate environment are back on the watch list, even more so should their profitability be at risk – even temporarily – due to macro events,

• And, of course, consumer discretionary exposed companies, whose growth is intrinsically tied to the performance of the consumer. In most market environments, stronger businesses can grow regardless of the macro, however there are conditions by which even the best brands and the best management teams can be overwhelmed.

The daily headlines regarding the conflict in the Middle East could spin on a dime – and get better or possibly worse. Regardless, we think there are some domestic economic effects which are pretty well baked in: inflation, confidence, interest rate increases as discussed. There are also unknown second and third order effects from what we are seeing in the supply chain, and this year is likely not done with surprises. Left field events like major economic disruption from fuel rationing, expansion of hostilities, acceleration in AI driven job losses and major failures across the property development and credit funding complex are all possible.

Realistically, companies may wait until May (confession season) before giving trading updates on the 2H FY26 impacts of what we are seeing today.