Weekly Reports | Feb 17 2017
Weekly Broker Wrap: health insurance data; Morgan Stanley's lead housing indicator; global industrial recovery; and the potential for a US/China trade dispute.
-Health insurer gross margins should be achievable in the upcoming results
-Weaker fundamentals surfacing in Australian housing construction
-Global industrial recovery underpins rebound in metals markets
-Market not pricing in any risk in US/China trade of a "hard versus asymmetrical" conflict
By Eva Brocklehurst
Private health insurance data and hospital statistics from APRA for the December quarter signalled growth in policy holders slowed to its lowest rate since 2004, while benefit growth is stabilising. Compositionally, benefits growth of 5.3% was driven by episodic growth of 3.3%. The proportion of the population covered by hospital private health insurance fell to 46.6%.
Goldman Sachs finds the data consistent with comments from Medibank Private ((MPL)) and suggests that insurance gross margins should be broadly in line with the second half of FY16 in the upcoming results. Thereafter, the broker expects margins will be more difficult to sustain into the second half and FY18. Goldman has Neutral ratings on both Medibank Private and nib ((NHF)).
Industry feedback suggests to Macquarie that a number of hospital groups are accelerating their invoicing process, which is pulling forward claims. As the APRA data is provided on a cash rather than accruals basis, the broker suspects that part of the rebound in claims growth is a one-off adjustment rather than an underlying shift in trends.
Claims data is materially below long-term averages, nonetheless. If both Medibank Private and nib do not recognise the change in payment patterns, and effectively over-reserve at the first half results, this will not be evident until the second half, Macquarie contends. The broker rates both stocks Outperform.
Credit Suisse observes the government has passed through another large premium rate increase and, while the current trends raise concerns for the industry, the earnings risk remains skewed in favour of insurers. The broker believes the slowing in policy-holder growth reflects the weakening economy, low wage growth and an industry that has reached its natural saturation point under the current regulatory setting.
The noteworthy feature of the statistics from a private health insurance perspective is the sixth consecutive drop in the population covered by private health insurance, UBS suggests. The price increase of 4.84%, to be implemented from April 1, is only likely to weigh further on this key metric for funding sustainability. The broker expects better execution on claims management relative to the industry should underpin FY17 net margins for Medibank Private. The broker retains a Neutral stance on the stock.
Morgan Stanley's housing lead indicator flags further weakness for Australian housing construction over 2017. The sub-components of the survey paint a weaker picture of the fundamentals such as supply/demand, rental conditions and accessibility. This is offset somewhat by looser credit conditions and stronger sentiment, particularly among investors.
While investors appear to be taking leadership of the housing market, the broker expects APRA and the Council of Financial Regulators will step up supervisory actions to manage financial stability risks. The broker believes red flags will be raised by any material increase in household leverage.
The broker notes, recently, Commonwealth Bank ((CBA)) has taken steps to slow investor loan growth, including stripping investor tax benefits out of serviceability tests, which targets stretched investors and could be more broadly applied across the industry.
The broker notes weaker trends are materialising for the apartment cycle in Sydney and Melbourne, although detached price growth remains strong. The broker expects development activities will slow earlier than consensus expects, given tighter credit for developers and investors.
The recovery in global industry accelerated into the end of 2016 and Macquarie believes this underpins a rebound in the metals markets. While suspecting, year-on-year, the growth rate is near its peak, the broker envisages a number of downside risks further out.
Industrial output rose a modest 0.12% in December, but this followed a strong jump in November. Over the fourth quarter output grew by 0.96% quarter on quarter, the best such performance since the fourth quarter of of 2013, the broker calculates.
China remains, by far, the largest contributor to global growth but the actual acceleration has been due to an improvement in other developing economies as well as developed economies. The broker notes in some cases, especially Brazil and Russia but also in the US, it is the simple fact that these industrial sectors have stopped contracting. In the EU growth accelerated at while Japan swung from contraction to solid growth.
The wild card in industrial production is the new US administration. President Trump has been vocal in supporting US-based manufacturing and energy production. Macquarie observes, so far, he has concentrated on persuading manufacturing firms to keep production in the US and more recently talked down the US dollar. Trade and tax policy is also likely to have an impact as the year progresses, especially if a border-adjusted cash flow tax is enacted.
Over the long term, the broker expects these factors will move the locale of global industrial production rather than the extent of it.
In China industrial production growth has been "eerily smooth" at around 6%, Macquarie observes. Mining output continues to shrink modestly. Manufacturing growth in December was higher, at 6.3% year-on-year, but has been falling slowly, offset by much-improved utility output.
With mixed features and variables in China, the broker, on balance, expects manufacturing growth to slowly decelerate over the coming year. One key sector is expected to be much weaker this year, automotive manufacturing. The broker forecasts production growth of just 2-3% versus nearly 5% last year.
it is likely to be only a matter of time before US/China trade relations appear at the top of President Trump's agenda, Citi believes. The broker defines a "soft" approach is one governed by World Trade Organisation rules and which aims to achieve a re-negotiation of the trading relationship. A "hard" approach is one that would not hesitate to seek a re-balancing of the trade outside a WTO framework.
The central question about China's response to a more hostile US approach to trade is whether Beijing will respond in a tit-for-tat (symmetrical) way or whether its reaction might range across the whole spectrum of the US/China bilateral relationship (asymmetrical).
Hence, Citi believes a trade dispute would be less disruptive globally if the conflict is characterised by a soft US administration approach and a symmetric Chinese response. The broker finds reason to be cautious, given the effects that such a conflict might have on risk appetite and expectations for growth in the largest and second largest economies. Citi does not believe the market is currently pricing in any risk of a hard versus asymmetrical conflict.
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