The Wrap: Wealth, NZ Insurance, Oil, US Coal

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Weekly Broker Wrap: wealth management; NZ general insurance; oil; US coal; and salaries.

-ASIC views on reforms could weigh on wealth management sector
-NZ general insurer GWP and margins set to improve
-Shale growth not enough to offset looming oil supply gap
-Renewed pressure on US coal power envisaged in 2018
 

By Eva Brocklehurst

Wealth Management

Although ASIC conditionally endorses vertical integration in the financial industry it has expressed clear views on some of the core components. The views of the regulator indicate that more extensive reform is required. This could weigh on sector ratings, UBS believes, until the findings of the Royal Commission become clearer.

The 2013 government's FOFA reforms banned advice trail commissions on new business but grandfathered pre-existing arrangements. ASIC has noted grandfathered commissions remain a significant part of adviser remuneration and provide incentives to maintain clients in legacy products even when there are better products.

ASIC believes grandfathering should cease to the maximum possible extent and UBS expects this could materially affect advice economics, increasing legacy product churn and pressure on platform fees.

Furthermore, the ability of ongoing service fees to be deducted automatically from platform investments may obscure the significance of the fees, ASIC attests.

While a requirement that service fees be invoiced to the customer and payment specifically authorised would not remove the ability to pay for advice from the platform, UBS suggests greater visibility of the fees may also affect adviser revenues.

The Royal Commission has also highlighted some deficiencies regarding the lawful entitlement of the recipients to fees the platforms deduct. While it remains unclear how pervasive the shortfall on controls is across the industry, UBS suspects this could be a key component of higher costs.

NZ General Insurance

Macquarie has analysed current trends in New Zealand's general insurance market. The broker concludes that the portfolios of Insurance Australia Group ((IAG)) and Suncorp ((SUN)) could be experiencing price rises of 13% and 12% respectively.

The broker also calculates the potential upside to the market from changes to regulations from July 2019. The Earthquake Commission will increase cover for losses to NZ$150,000 from NZ$100,000 from July and remove the NZ$20,000 cover for contents.

Macquarie suggests this could improve gross written premiums (GWP) and margins across the market for private insurers and estimates NZ$100m of additional GWP could be added to the market in five years. The broker estimates margins could improve by 120 basis points for Insurance Australia Group's NZ division and by around 110 basis points for Suncorp from FY20.

Macquarie has downgraded Insurance Australia Group to Underperform from Neutral, envisaging heightened risk, given the stock is currently trading at a two-year forward PE of 19.2x. The broker remains cautious about the potential for downside surprise in the second half result for Suncorp and retains an Underperform rating.

Oil

Oil supply concerns now represent a sudden shift from the abundant production and low prices experienced between 2014-2016, when OPEC attempted to take market share from rapidly growing shale producers. Aberdeen Standard asks, with prices rising again, will shale oil be able to fill the supply gap?

Research suggests producers with existing wells can provide up to 6mbpd and, at prevailing prices, this could rise to almost 10mbpd as new projects become profitable. The downside, Aberdeen Standard notes, is that it will take until 2024 these wells to come on line. Therefore, shale supply is not elastic enough to prevent short-term tightness.

Analysis shows the oil futures forward curve is indicating markets expect the recent spike in oil prices to prove temporary and for Brent to slowly decline from current levels. Nevertheless, the analysts expect that, if prices continue to spike, oil supply shocks risk denting a synchronised global upswing.

Brent prices have been rising steadily and are currently trading at US$78 a barrel, a 50% increase over the past 12 months and the highest price since oil started to fall precipitously in late 2014. Explanations include the US withdrawal from the Iran nuclear deal and fears over Venezuelan production, as well as geopolitical tensions in the Middle East.

US Coal

Commonwealth Bank analysts observe US coal power faces renewed pressure in 2018. Coal decreased as a source of power generation to 26.8% in February from 29.9% a year earlier. The share of natural gas in the US electricity generation, meanwhile, averaged 31.4%, up from 27.9%. Other power sources, mostly wind and solar, lifted share slightly.

The analysts believe US coal power output is expected to fare worse than natural gas this year because of the decommissioning of 13GW of coal-fired power plants. In 2016 coal power generation slumped nearly -9%, driven by low prices for natural gas and a US energy policy that encouraged lower emissions.

These drivers have eased as gas prices move higher and President Trump supports the US coal sector but they still remain a threat. US coal output is estimated to have lifted 6% last year after a contraction of nearly -19% in 2016. The US Energy Information Administration still expects a growing deficit in the US coal market and supply to contract faster than demand.

The EIA remains more positive about natural gas power output, anticipating growth of 8.3% in 2018 along with the commissioning of around 20GW of new capacity. Natural gas is expected to average 4.9 percentage points higher share than coal in US power generation in 2018, and the gap is expected to expand in 2019.

Salaries

Salaries in Australia have risen for the first time in six years, a new report has found. The 2018 national salary survey has found an increase in the growth of wages to 2.9% from 2.8%. The survey, conducted by the Institute of Managers and Leaders, suggests the largest increase in wages growth is being experienced in the business and professional services industry.

The greatest decrease in salary movements is in fast-moving consumer goods manufacturing. The survey also notes a shift in the origins of Australia's migrant workforce. More businesses are employing talent from Europe and from China, with the proportion of organisations employing UK and North American staff dropping dramatically.

The migrant workforce is also experiencing a trend towards long-term employment, with a -3.1% drop in businesses hiring overseas workers for less than two years. This is against the steady movement towards casualisation of the Australian workforce in recent years, the report notes.

Nevertheless organisations are recruiting more permanent staff, with 51% of businesses reporting increases in the past 12 months. The workforce is also experiencing a hike in those workers demanding more flexible start and finish times.

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