The Wrap: Canaries, 5G, Telcos & IP Services

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Weekly Broker Wrap: canaries; monetary policies; 5G; telcos and IP services.

-Early warnings growing for deterioration in Australian economy
-Global monetary policies remain on a gradual path
-Southern Asia-Pacific at the centre of the next-generation technologies
-Telstra obtains greater share of net NBN additions in the September quarter
-Recovery indicated in IP services market
 

By Eva Brocklehurst

Canaries

The list of early warning indicators of a deterioration in the Australian economy has grown. Bailieu Holst has now found seven "canaries in the coal mine" and is increasingly concerned about the outlook for the domestic economy.

The seven indicators include: vehicle sales, down -4.1% year-on-year; home prices, down -4.6% with a -45% decline in auction sales; housing finance, down -27% for investors and -14% for owner occupiers from peaks; money supply growth, down -2%; business confidence (NAB survey) below average; drought; and slowing job advertisements (ANZ series).

The signals are for lower consumption, slower business investment and weaker jobs growth, which in turn indicates demand and earnings growth in the private economy will be soft. The broker remains underweight on domestic sectors such as retail, media, housing and banks.

Monetary Policies

ANZ analysts point out that while US GDP momentum remains above trend, there are signs the interest-rate sensitive sectors are coming under pressure. The analysts expect the effects of the US tax cuts will fade from the second quarter in 2019 and growth will moderate towards trend. The analysts are also sceptical of any meaningful progress on the US/China trade tensions.

Meanwhile, oil prices have weakened and headline rates of inflation are expected to ease. The US Federal Reserve has indicated it may still be some way from creating a neutral rate setting, and there is no evidence the analysts can find that the Fed considers interest rates have reached an appropriate level. Estimates suggest the Fed may be close to neutral but current growth rates remain a concern.

Growth in the euro area has disappointed over 2018 and while expansion is in place, the analysts note manufacturing is suffering. The European Central Bank will reassess the outlook at its policy meeting on December 13. The ANZ analysts still expect quantitative easing to end next month but risks exist for the forward guidance to be even more gradual.

At the October meeting, the Bank of Japan reduced its inflation view, which indicates an extended period of keeping rates low has become even longer. The Bank of Japan is also growing more concerned about the downside risk to inflation and mounting financial instability risks.

5G

MIT's Technology Review puts the southern Asia-Pacific in the centre of next-generation technologies such as a artificial intelligence, big data, blockchain, robotics and connected devices. The robotics and advanced manufacturing that are well established in eastern Asia are now spreading to Singapore and Malaysia. Consumer application in emerging markets such as Indonesia and the Philippines are booming on the back of widening access to the internet.

The analysis finds deep knowledge of local consumption and needs allowed home-grown companies to excel and brush off overseas competitors. The first impact is expected on manufacturing and subsequently smart cities and autonomous vehicles.

The majority of companies surveyed across the six markets in the review expect 5G to be launched in 2020. 5G is expected to boost efficiency and 51% of companies are investing in technologies that can be deployed when 5G is launched.

The review calls for clear, robust rules in order to put digital innovation on a sound footing as 5G intensifies the challenges surrounding data privacy. One forecast canvassed by the review predicts that 60% of the wider Asia Pacific region's GDP will be derived from digital products or services by 2021.

Telcos

The latest Australian Competition and Consumer Commission disclosures on the NBN indicate Telstra ((TLS)) obtained a greater share of net additions. UBS estimates Telstra won 52.4% in the September quarter versus its overall share of 49.8%. TPG Telecom ((TPG)) has also lifted its share to 19.6% of net additions. Vocus ((VOC)) has lost momentum, taking only 7.1% share of net additions.

The roll-out retains its original skew with around 61% of net additions in the September quarter in regional areas. Macquarie notes Telstra has stronger share in regional areas and expects the overall share to ease back as the connections become more biased towards metro.

UBS believes, while a high NBN share is strategically favourable for Telstra's customer relationship, this will only translate to higher near-term profitability if wholesale prices change. The broker also believes slower subscriber growth for TPG Telecom is somewhat factored into expectations. Macquarie points out TPG Telecom tends to outperform in metro areas and may experience improvement as the roll-out shifts in coming quarters.

The slowdown in net additions for Vocus is an incremental negative. Still, UBS believes the challenges for Vocus are well understood and the company has already flagged a skew to the second half. Macquarie observes Vocus has changed its strategy to concentrate on digital channels over the more expensive customer acquisition channels. The Dodo brand was relaunched in late August.

Overall, Macquarie remains cautious on the outlook for the Australian telecommunications market as competitive dynamics pressure revenue and earnings across all segments.

IP Services

A market recovery is being signalled for the intellectual property services industry. Bell Potter analyses the market based on data sourced from IP Australia. Filing numbers in the nine months to September 30 were up 3.0% and the data is likely to be revised higher, the broker suspects. The number of patent filings provides a relatively early indicator of potential examination workflow.

The number of directions to request patent examinations was up 13.9%, with gains mostly in the June half year because of the depressed prior comparable period. In the September quarter directions were broadly stable.

Examination requests for the period were up 4.6%, broadly stable. This, in the broker's estimates, provides a more direct indicator of workflow over the next 12-24 months. Bell Potter maintains Buy ratings for IPH Ltd ((IPH)), Qantm IP ((QIP)) and Xenith IP ((XIP)).

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