Weekly Reports | Mar 08 2019
Weekly Broker Wrap: Oz economy & RBA cash rate; A-REITs; retailers; financial advice; and online classifieds.
-December quarter GDP brings official rate cut into play, Macquarie expects -50bps in cuts by year end
-Office, industrial property the highlight of A-REITs performance while retail, residential under pressure
-Outlook for retailers increasingly cautious
-Shake out continues for financial advice, superannuation
-Subdued outlook for online classifieds
By Eva Brocklehurst
Oz Economy And RBA Cash Rate
Australia's December quarter GDP grew just 0.2%, below expectations. Annual growth has slowed to 2.3% and the second half of 2018 was the slowest six months of growth since 2008. Dwelling and mining investment were the main detractors from growth, while government spending was the main driver.
Housing exposed sectors are a key point of weakness and dwelling construction appears to have peaked. Household expenditure was also very subdued, with the slowdown centred on discretionary categories.
Morgan Stanley suggests the GDP numbers are a signal that household de-leveraging is beginning and more likely to be a headwind to expenditure going forward. The broker lowers GDP growth forecasts to 2.2% for 2019.
This implies that, in turn, the Reserve Bank of Australia will need to reduce its GDP forecast for 2019, after reducing it 50 basis points to 2.75% just a month ago. This, in turn, increases the risk of an official rate cut this year, although the broker notes the RBA governor, Philip Lowe has made it clear the labour market will be the ultimate determinant of rate reductions.
As Morgan Stanley expects the unemployment rate will only rise to 5.2% over 2019, with government-linked sectors absorbing spare capacity, this is not expected to be enough to propel the central bank to cut the cash rate, yet.
Macquarie, on the other hand, now suspects the RBA will cut the cash rate by -50 basis points to 1% this year, noting the markets have a -25 basis points reduction fully priced by late this year.
Macquarie suggests May or August are the most likely months for the first cut to the cash rate. The broker is definitely not of the view that central banks should keep their moves in check in case growth turns out to be weaker down the track.
Instead, if additional policy support is necessary the broker believes it should be provided, and provided early, rather than having to take more drastic action if growth turns down sharply. In the event of a sharp downturn in economic growth, Macquarie believes there is ample fiscal ammunition and unconventional policy tools such as quantitative easing available to policymakers.
The broker is also not of the view that reducing the cash rate, which is at a low level historically, would provide little economic support. Reductions are likely to be substantially passed through to actual lending rates, and the Australian dollar would also be lower. There is also little risk that easier policy will lead to growth that is too strong.
Office and industrial property revealed strong net operating income growth over the recent reporting season. Fundamentals remain supportive. Within the sector, valuation differentials have widened and higher multiples were ascribed to stocks with expanding earnings growth, Ord Minnett points out. The broker observes healthy user demand and limited supply coming online.
Meanwhile, in retail, conditions remain challenging and capitalisation rates were flat, with pockets of weakness also noted in valuations. Development has been scaled down and the number of assets on the market is increasing.
The broker also notes the time to sell is being pushed out. Ord Minnett expects residential A-REITs earnings will peak soon, and most groups in this market rely on a second half skew. This will mean pressure on FY21 or FY22 because of slower sales rates. Ord Minnett has recently upgraded Vicinity Centres ((VCX)) to Buy and Charter Hall Group ((CHC)) to Accumulate.
Residential and retail segments were worse than UBS expected in the latest reporting season. The number of retail assets on the market have come under increased scrutiny and appear set to be the largest headwind for the sector in 2019.
UBS downgrades the earnings of those A-REITs exposed to residential and retail by -2-4%, to reflect lower residential sales rates, lower retail income growth and a deterioration in pricing/terms of retail assets. The broker upgrades expectations for Goodman Group ((GMG)) and Charter Hall, to reflect higher growth in funds under management, more performance fees and increased development profits.
Credit Suisse observes most retailers under coverage experienced decelerating sales growth over the latest half-year reports. The outlook appears increasingly cautious. Online business once again dominated the growth scenario, accounting for half of retail sector revenue growth in the period.
Expenditure on digital technology also increased, even though the monetisation remains elusive in many areas. Credit Suisse evaluates Woolworths ((WOW)) as the most advanced in its digital initiatives.
Meanwhile, Breville Group ((BRG)) delivered the highest shareholder return over the past three months, followed by Harvey Norman ((HVN)) and Wesfarmers ((WES)). Debate centres on the impact of structural change, particularly in electrical, and the broker remains decidedly bearish. Expectations for margin expansion also appear to have been tempered.
Credit Suisse elevates Woolworths in order of preference amongst retailers and maintains an Outperform rating on Caltex ((CTX)), as an off-market buyback is providing support for the near term and convenience earnings appear to be stabilising.
Credit Suisse likes the under-geared balance sheet and strong cash generating businesses of Wesfarmers and considers the company's next step is likely to be an acquisition. The outcome for Flight Centre ((FLT)) in the first half was worse than Credit Suisse expected in the broker now envisages a higher risk of a downgrade.
The upheaval in financial advice has instigated a record decline for large integrated operators over February, with Bell Potter noting -135 advisers have left the likes of AMP ((AMP)), IOOF ((IFL)) and the major banks. The broker believes the recommendations from the Hayne Royal Commission are material and it will take years for the industry to properly adjust. AMP appears the most caught up in the whirlwind.
Following the 2018 federal budget, reforms to superannuation were passed in February, limiting fees on balances below $6000, consolidating inactive accounts and removing exit fees.
AMP has flagged a meaningful impact on earnings while IOOF is yet to do so. Both have flagged price reductions and Bell Potter envisages a need to cut fees further. The broker continues to have a Sell rating on both stocks and envisages material downside. Bell Potter's preferred exposure in the segment is Netwealth ((NWL)), followed by Onevue Holdings ((OVH)).
The latest reporting season has reinforced the view that online classifieds will sustain a softer second half, with implications for Domain Group ((DHG)) and REA Group ((REA)). UBS notes, in Sydney, new listings for real estate have declined -25% for the four weeks to February 24 and, importantly, on more meaningful volumes. New listings have also declined -24% in Melbourne.
The NSW election, in three weeks time, is seen impacting marketing campaigns. UBS envisages some improvement post the election as an early Easter in 2018 is cycled, but growth is likely to worsen again as the Easter break and Anzac Day clash at the end of April. Then there is the federal election in May, also likely to have a negative impact on new listings.
On the employment front, hiring activity after the Chinese New Year has not been as strong, which has implications for Seek ((SEK)). UBS observes some positive aspects are emerging for display advertising in the automotive segment as dealer expenditure online improved, with growth of 17% in January.
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