Rudi's View | Feb 08 2018
In this week's Weekly Insights (this is part two):
-The Correction We Had To Have
-RBA: Waiting For Godot?
-Conviction Calls: Citi, Morgans, Ord Minnett, Morgan Stanley, UBS, Canaccord Genuity
-February 2018 Reporting Season Preview
[Note the non-highlighted items appeared in part one published on the website on Wednesday]
By Rudi Filapek-Vandyck, Editor FNArena
RBA: Waiting For Godot?
Economists live by data and calculations and models these days, but if you happen to have the feeling they should get out more and put their nose more often inside the real world, you are probably more right than wrong.
Easier said than done though, and who's to say anecdotal insights beat excel sheet inputs all the time?
I have a problem with the confident kind stepping into the media limelight with predictions about first rate hikes from the RBA as early as in May, when most of those same forecasters were on the wrong side of the RBA policy trajectory throughout the whole of 2017.
Maybe I pay too much attention to the darker side of ultra-low interest rates in Australia, the future will tell, but certainly the latest survey released by ME Bank into financial comfort among households in Australia has done nothing but reinforce my concern that when the RBA indeed starts lifting the official cash rate, we should all prepare for more negative news to come out of the woodwork.
On the report's assessment, households' comfort with paying for monthly living expenses has now fallen to the lowest level since mid-2014, with many respondents indicating their financial situation is worsening, not improving. For some 56% of households paying rent or paying off a mortgage now commands more than 30% of their disposable household income, explained as "a common indicator of financial stress" in the report.
When it comes to pointing out the obvious, the author shows no appetite for dillydallying around the key issues either: "Mortgage defaults may escalate if interest rates increase, particularly among vulnerable low-income households already dealing with the rising cost of necessities".
There are a lot more stats and insights inside the report which counts 56 pages and is freely available through the ME Bank website (just put 'me bank household financial' in Google).
UBS: Banks Are Mis-Selling Mortgages
The ME Bank survey/report preceded a potentially more damaging report put together by banking analysts Jonathan Mott and Rachel Bentvelzen at UBS. They have gone through mortgage borrowers data provided by CommBank ((CBA)), National Australia Bank ((NAB)) and Westpac ((WBC)) and compared those with data available through the Census, the Australian Tax Office and the Household Income & Wealth Survey from the Australian Bureau of Statistics (ABS).
The data don't match, leading UBS to conclude Australians are lying about their true finances when it comes to the nitty gritty to secure a mortgage loan. "Factually inaccurate mortgage applications" is the exact terminology used in the report. Given the terms of reference for the upcoming Royal Commission has been widened to include mortgage brokers, UBS suspects we are going to hear a lot more about mis-selling mortgages through the banks in Australia.
Is this the next banking scandal waiting to be uncovered?
Investors should note earlier research published by the same team at UBS already suggested no less than 33% of borrowers were "not completely factual and accurate" when filling out their applications.
RBA: Continuing Source Of Uncertainty
No surprise thus, the RBA itself highlighted Australian households as a "continuing source of uncertainty" given weak growth in household incomes and high debt levels in its statement following the no change decision on Tuesday. No surprise also as to why Westpac reiterated its forecast that the RBA cash rate is likely to remain untouched throughout 2018, as well as throughout 2019.
Westpac's reasoning was once again explained by team member Justin Smirk in a video on Monday, titled "Looking for inflation is like waiting for Godot". Admittedly, my heart bleeds, and heavily. Why didn't I come up with a title like that?
DB Sees Lower Inflation Ahead
Talking about local inflation, Deutsche Bank chief economist Adam Boyton released a very interesting insight last week, highlighting just how narrowly based is the low inflation we are witnessing in Australia today.
Were we to exclude just five items: petrol prices, health and education expenses, tobacco and utilities, then inflation in Australia over the twelve months to December 2017 was only 0.6%. Including these five items, it was reported as 1.9% (headline).
Boyton doesn't think it too far fetched to assume these five won't contribute in the same manner in 2018. He thinks it's possible headline CPI might fall towards 1.4% by year-end, all else remaining equal.
RBA rate hikes? I wouldn't start betting on it right now.
February 2018 Reporting Season Preview
The February corporate reporting season in Australia takes place against a background of global equities going through a 'Risk Off' phase with Wall Street correcting from dizzying highs, and the rest of the world unable to escape gravity, even when the Australian share market has seldom been able to match the performance of its offshore peers post 2009, let alone over the year past.
C'est la vie, say the old folks; just goes to show one never can tell the exact outcome when forced selling and herd behaviour push rational decision making out the door.
Assuming corporate performances will still count this month, many a market strategist is expecting a generally solid performance from Australian companies. The fact that confession season ahead of February has been rather quiet, plus ongoing strong economic momentum just about everywhere around the globe feed into expectations that this month more companies will be able to outdo analysts' forecasts.
This optimism in particular applies to resources companies where expectations have been steadily building on the back of stronger-for-longer commodity prices, and now analysts are looking forward to more capital management in the form of extended payouts and share buybacks from, especially, bulk commodity producers including Rio Tinto ((RIO)), BHP Billiton ((BHP)), Whitehaven Coal ((WHC)), Fortescue Metals ((FMG)), and a number of others.
[Rio Tinto, on Wednesday, responded by announcing a record final dividend plus an additional $1bn to the shares buyback]
Adding to the underlying bullish undertone is the fact that earnings forecasts for ASX200 companies have been rising over the months past, which is generally seen as a positive signal. As was the case throughout 2017, the bulk of earnings forecasts upgrades comes from resources stocks. Ex-resources, the picture looks a lot more benign (but positive, nevertheless).
On average, Australian profits are forecast to grow by 7-8% this financial year, with upside bias depending on how much exactly miners and energy producers can add into the mix. This is a marked slow down from the 17% EPS growth achieved in FY17. It is also markedly lower than the 14% that is being forecast internationally.
Thus, Australia is seen as remaining a laggard, internationally, but there remains support from a resilient housing market, benign growth in consumer spending, plus the global uptick in economic momentum. Over the past few months, consensus earnings momentum has specifically improved for healthcare companies, diversified financials and utilities but deteriorated for insurers, telecom companies and retailers.
Since reporting season is all about expectations and whether they have been appropriately priced in, and how company results compare, there will always be expert voices that see dangers and threats in the former group and potential for opportunities in the latter sectors.
Quite a few analysts have expressed their doubt whether high growth, high PE companies will be able to meet lofty market expectations. On the other side of the coin, a number now sees potential for an upside surprise from Telstra ((TLS)), Coca-Cola Amatil ((CCL)), AMP ltd ((AMP)), Woolworths ((WOW)), Origin Energy ((ORG)), and various other large cap companies.
Could the market finally have become too bearish on Vocus Communications ((VOC))?
Sometimes expectations can fall low enough ahead of results, making it a lot easier for management teams to come out on top vis a vis market sceptics. But there are never guarantees.
Amcor ((AMC)) is one stock that is dividing the analyst community ahead of its result. Those with a positive view suggest the mild profit warning issued last year has triggered a re-basing, creating a platform to now return to business as usual. There are others though who sense it may have been a precursor to more bad news through a lowering of the FY guidance when the interim report is released.
In similar fashion, there seem to be risks regarding margin pressure at Challenger Financial ((CFG)), and slower execution at NextDC ((NXT)), Domino's Pizza ((DMP)) and Lend Lease ((LLC)), but all these stocks equally attract positive views elsewhere. Other divisive stocks include Insurance Australia Group ((IAG)), Computershare ((CPU)), and Seek ((SEK)).
Companies that feature high on analysts' lists for potential negative surprises include Healthscope ((HSO)), Primary Health Care ((PRY)), Regis Healthcare ((REG)), Silver Chef ((SIV)), Cabcharge Australia ((CAB)), GBST ((GBT)), Crown ((CWN)), and Retail Food Group ((RFG)).
Ardent Leisure ((AAD)) was widely nominated as well, and that has been proven correct. Citi continues to see danger surrounding Event Hospitality and Entertainment ((EVT)) and Village Roadshow ((VRL)). Internal instability at Domain Group ((DMG)) is also feeding market expectations for a (potentially) disappointing market update.
Every reporting season, or so it seems, there is one analyst somewhere who believes InvoCare ((IVC)) is going to miss market expectations badly. This February is no exception. One day, maybe.
Amongst those nominated for likely positive surprises are Altium ((ALU)), Ausdrill ((ASL)), Bingo Industries ((BIN)), Boral ((BLD)), Cleanaway Waste Management ((CWY)), Corporate Travel ((CTD)), Link Administration ((LNK)), Megaport ((MP1)), Perpetual ((PPT), Reliance Worldwide ((RWC)), Star Entertainment ((SGR)), and Webjet ((WEB)).
One of the sectors poised for some upbeat reports looks to be good old fashioned free-to-air TV with indications the sector has enjoyed a reasonably strong six months, while radio seems to be doing better as well. Citi analysts do not believe this revival in operational momentum is sustainable. The analysts think the market will thus zoom in on how well companies such as Nine Entertainment ((NEC)) are managing to keep cost growth under control.
Outdoor media continues to grab market share, but here the picture remains clouded because of contract losses for APN Outdoor ((APO)) and HT&E ((HT1)). oOh!media ((OML)) in particular is expected to release a strong performance.
The stand-out sector nominated for upside surprises is the local retail industry with analysts, on average, positive about JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). UBS even nominates The Reject Shop ((TRS))! Nobody mentions Myer ((MYR)), except in a negative sense.
One stock that is broadly being associated with retail, but incorrectly as far as I am concerned, is Bapcor ((BAP)). Most analysts covering the stock see but positives on the horizon, irrespective of market scepticism. Nick Scali (NCK)), on the other hand, is steadfastly supported by lofty expectations. It's result this week probably deserves the rating "not bad".
As per usual, FNArena will keep a close eye on changes and opinions during reporting season, with daily updates available through The Australian Broker Call Report and Stock Analysis. From this month onwards, the service has been enriched with a dedicated and permanent Reporting Season Monitor on the website.
Also, Weekly Ratings, Targets, Forecast Changes, updated and published every Monday morning, keeps track of ratings, price targets and changes to earnings forecasts on a weekly basis.
Late addition on Thursday morning: Macquarie analysts released their Highest Conviction forecasts prior the February reporting season. For an upside surprise they nominate Monadelphous ((MND)), Reliance Worldwide, Boral, AUB Group ((AUB)) and Nine Entertainment.
Two companies are named for a negative surprise: Cromwell Property Group ((CMW)) and Myer.
Rudi On TV
This week my appearances on the Sky Business channel are scheduled as follows:
-Tuesday, 11.15am Skype-link to discuss broker calls
-Thursday, Trading Day Live, noon-2pm
-Friday, 11.15am Skype-link to discuss broker calls
Rudi On Tour
-Presentations to ASA members and guests Gold Coast and Brisbane (2x), in June
-Presentation to ASA members and guests Wollongong, in September
(This story was written on Monday 5th February and Tuesday 6th February, 2018. This first part was published on the Monday in the form of an email to paying subscribers at FNArena, and will be published again on Wednesday as a story on the website. Part two shall be published on Thursday).
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