Rudi’s View: Feb ’18 Reporting Season Preview

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 08 2018

In this week's Weekly Insights (this is part two):

-Extra Service
-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.

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