Weekly Reports | Oct 07 2016
This story features MEDIBANK PRIVATE LIMITED, and other companies. For more info SHARE ANALYSIS: MPL
Outlook for health insurance; Equity inflows recover; US presidential campaign; outlook for A-REITs; vulnerabilities in China's housing market.
-Policy needs to address increased utilisation and declining participation in private health insurance
-Consumers maintain preference to save and invest in housing despite high yields from equities
-A-REIT earnings growth may be affected in near term as several sell off non-core assets
-Steel and iron ore vulnerable to potential slowdown in China's housing market
By Eva Brocklehurst
A structural change is required in the private health insurance sector. Macquarie believes government policy is required to support medium to long term participation by the private health insurance industry, given increased utilisation of health services and declining participation in insurance among the young.
There are three main issues the broker canvasses: affordability, where wages growth has not kept pace with premium increases; value, where older policy holders are increasing as a proportion and putting pressure on the system; and penetration, as participation by those under 65 has declined over the past three quarters.
Ahead of any policy change, Macquarie moderates its expectations for the industry and believes all stake holders will have to respond, irrespective of government action. Policy holders are already downgrading or dropping out and insurers have had to cut cover to support affordability.
Nevertheless, the broker upgrades Medibank Private ((MPL)) and nib Holdings ((NHF)) to Outperform from Neutral, believing its forecasts capture the impact of value and affordability on net margin performance.
June quarter data on financial market flows confirms a recovery of funds into equities after weakness in the first quarter. ASX data also suggest further improvement in capital raisings as well. Citi observes, lagging this improvement, is consumer sentiment regarding investing, reflected in surveys. These signal a preference to save, despite record low interest rates and the relatively high earnings and yields from equities.
Superannuation funds have continued to account for the largest inflows to equities and remain higher than a few years ago. Foreign investor inflows are also solid, Citi observes. In contrast domestic investors have been patchy, which is in line with the weak consumer sentiment readings. Citi suggests this caution and tendency to save has more to do with the property market than shares.
June quarter contributions to super were down on the prior five years but the broker suggests this probably reflects concerns around the tax changes in the budget. Households on the other hand have continued to build deposits and invest in housing.
Citi wonders whether Hillary Clinton's post-debate bounce will be maintained. Ms Clinton now leads national polls by 3.8 percentage points. Moreover, her personal favourability numbers have slightly improved. The broker flags heightened risk of disruptions to the campaign and outcome in this election and believes disruptions can cast doubt on the legitimacy of the final result.
Markets are still only partially pricing in a Donald Trump victory. An earlier rally in the US dollar against the Mexican peso was the clearest indication that the risk of his victory was rising, Citi observes, but since the first debate this currency pair has rolled over.
The assumption is that Mr Trump will head an expansionary fiscal policy but the broker continues to regard the potential for reforms as low, emphasising that the last fiscal stimulus was extremely unpopular with voters.
Real Estate Investment Trusts
Australian Real Estate Investment Trusts (A-REITs) were one of the worst performing sectors in August, Morgans observes. As expectations for a US interest rate hike dissipated in September the sector made a recovery. On a 12-month basis, listed property has then outperformed, with a total return of around 22% versus the broader market at around 13%.
Distribution or earnings growth for some entities may be affected in the near term as many have taken the opportunity to sell non-core assets given the strong market conditions. Morgans also flags a plethora of property IPOs (initial public offering) which have come to market recently including Australia Office Fund ((AOF)), Propertylink ((PLG)) and Viva Energy REIT ((VVR)).
Charter Hall Long WALE REIT is also expected to list before year end. It is expected to have a market cap around $1bn with a portfolio of assets with of long-weighted average lease expiries.
The broker's preferences among small/mid caps include 360 Capital Industrial Fund ((TIX)), which has potential to be included in the the ASX 200 in the medium term and has an attractive distribution yield of around 7.8%, Aventus Retail Fund ((AVN)), exposed to large format retail, and Asia Pacific Data Centres ((AJD)), which has a defensive yield of around 6%.
In large caps the broker prefers Stockland ((SGP)) for its diversity and, for its global diversity, Westfield ((WFD)). Morgans likes Goodman Group ((GMG)) as it offers exposure to logistics and industrial assets with distribution growth of 6%.
China's housing market has rebounded this year, which Goldman Sachs observes is partly from the effects of policy stimulus. Home mortgages grew 30% in the June quarter, double the average annual pace of the previous five years. The broker's economists estimate that housing is responsible for 14% of China's economic output.
Beneath the rising prices and increasing sales, Goldman envisages the property market is become vulnerable. Policy-driven housing booms tend to be followed by slumps. Over building in regions where demand is declining can lead to large inventories that weigh on local markets for years.
This is the case because housing is durable and depreciates very slowly and excess inventory tends to exacerbate a downturn when demand suddenly falls. The broker adds that deteriorating affordability and strong investment motives also add to downside risks to future construction activity.
Given the importance of the property market to metal demand in China, the broker believes this points to risks for prices. Over the past two years iron ore prices have displayed the highest correlation in metals with Chinese construction activity. This makes steel and iron ore more vulnerable to a potential housing slowdown in China compared with base metals.
Goldman Sachs also envisages increasing risks to commercial real estate in China. Commercial properties are more steel intensive and this is why the broker suspects steel and iron ore may face more challenges going forward.
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For more info SHARE ANALYSIS: AOF - AUSTRALIAN UNITY OFFICE FUND
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