The Australian economy and specific ASX stocks have been held back by the high interest rate set by the Reserve Bank of Australia (RBA) to reduce economic demand and tame inflation.
However, the RBA's job largely seems successful, and now there's a broad view that 2025 could see multiple interest rate cuts.
Not only could rate cuts help ASX stock valuations generally, but they could also increase demand for economically linked industries, such as discretionary retail and building products.
There's another theme that could bode well for certain businesses in the foreseeable future – analysis from KPMG Australia has shown that spending on renovations has increased.
The research showed that renovation spending has climbed from 34.2% of total residential construction spending in FY19 to 40% in FY24. KPMG Australia said more straightforward planning processes and lower risks for builders make renovating existing homes a favoured option over adding multiple homes on the same block.
With potential rate cuts on the cards and stronger demand for building products, I think these two ASX stocks are poised to benefit.
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Wesfarmers Ltd (ASX: WES)
Wesfarmers' biggest earnings generator is Bunnings Group, the biggest hardware retailer in Australia. Bunnings Group includes multiple businesses, including Bunnings, Tool Kit Depot, and Beaumont Tiles.
Bunnings Group has an impressive return on capital (ROC) of 71.5%, which means it's very profitable on money invested in the business.
Wesfarmers is trying to provide customers with the lowest prices, widest range, and best experiences. Bunnings Group has been expanding its range in the power garden, tools, smart home, and consumables categories to drive sales. Its online growth (including its marketplace) is also helping sales.
The company is also looking to improve profitability by focusing on productivity and making investments in technology and its supply chain.
In terms of construction-driven demand, Wesfarmers said building activity is expected to persist in the next few months, but population growth and the undersupply of housing are expected to "support a recovery over the medium term".
Metcash Ltd (ASX: MTS)
Metcash is a diversified ASX stock with three key pillars – food, liquor, and hardware.
It supplies IGA supermarkets across Australia and independent liquor stores such as Cellarbrations, The Bottle-O, IGA Liquor, Porters, and Thirsty Camel.
The division I'm going to highlight today is the various businesses that Metcash owns.
It owns the businesses Mitre 10, Home Hardware, Total Tools, Alpine Truss, and Bianco Construction Supplies. Metcash supports independent operators under the small format convenience banners Thrifty-Link Hardware and True Value Hardware, as well as a number of unbannered independent operators. Metcash also has a full bathroom and kitchen appliance offer through its Hardings business.
The ASX stock thinks it's well-placed to benefit from an improvement in the economy, while it looks to improve its profit margins and grow online. New stores could also help increase profits.
