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The Wrap: US Homes, Oz Migrants & Platforms

Weekly Reports | Mar 29 2019

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

Weekly Broker Wrap: US housing; Australian immigration; discretionary retailers; and platforms.

-Mismatch in housing supply and demand developing, as US population becomes younger
-Australian migration levels need to be monitored, as reduced migration may impact demand
-Slowing fund flows across platforms heightens competition
-Specialist fund platforms continue to gain market share

 

By Eva Brocklehurst

US Housing

The percentage of youth in the US population is increasing rapidly and by 2034 those born between 1997 and 2012 will become the country's largest cohort, at around 78m. To Morgan Stanley this implies a brighter long-term outlook for the US versus other G10 economies and is likely to shape housing consumption trends.

The broker's analysis of census data shows labour force growth will trend upwards from the 2020s and trend consumption growth should rise to 2.5% in the 2030s, from around 1.7% in 2018. Housing demand, which the broker suggests should remain healthy, is likely to sustain rises in house prices and rents, although the younger generations are more likely to rent than the baby boomers of the past.

While expecting these young generations will fuel a 7% increase in demand, this is insufficient to overcome the 43% increase in housing supply expected as ageing baby boomers return existing stock to the market. The vast majority of this supply of housing is from owner-occupiers, who will use home equity as a primary source of value to fund seniors housing.

However, new generation demand is being more skewed towards apartments. The broker envisages net demand of 6.7m for rental units over the next 10 years in the US, 22% above the long-term average.

Another trend Morgan Stanley notes is online "iBuying" businesses being built by companies such as Zillow, aiming to acquire, fix and re-sell homes quickly and take advantage of changing consumer behaviour in the US housing market.

US online real estate penetration remains the second lowest category, only ahead of grocery, because of the size, infrequency and complexity of home buying and the high value placed on real estate agents' local knowledge and expertise.

Morgan Stanley expects the iBuying model will gain traction but online adoption will stay relatively low. Still the size of the US residential real estate market means that even a low 3% penetration implies iBuyers would purchase around 175,000 homes in 2030.

Australian Immigration

Immigration to Australia and the growth it engenders has become a hot policy topic, Morgan Stanley asserts. The government has announced a reduction in the permanent migration visa quota to 160,000 annually, from 190,000, over the next four years.

Morgan Stanley does not expect a short-term impact but believes net migration still needs to be managed, given the strong support for growth and employment the channel provides. That said, the drop in permanent migration has masked a substantial acceleration in the number of temporary visas being issued, which will keep annual net migration elevated.

A slowdown of 50,000 in net migration would reduce GDP by -0.2 percentage points, the broker calculates, all else being equal. It is also important for housing demand and, on Morgan Stanley's estimates, the excess supply of new houses will narrow in 2020. If migration slows this will put further pressure on house prices. Moreover, given the infrastructure activity, the emergence of skill shortages with any decline in migration will need to be monitored.

Discretionary Retailers

Macquarie highlights stocks that could benefit if some pre-election assistance to households was provided in the 2019 Commonwealth budget. Historically, a boost in household income has meant an uplift in sales for discretionary retailers. Australian consumers are currently experiencing falling house prices, anaemic wage growth and pressures on cost of living.

Macquarie believes any fiscal assistance would be good news for the PE multiples of stocks such as JB Hi-Fi ((JBH)), Harvey Norman ((HVN)) and Domino's Pizza ((DMP)). While not expecting the hand-out provided in the 2009 budget, the broker believes this gave an indication of how consumers may spend a small increase in income.

Clothing, footwear, department stores and recreational goods saw a noticeable boost after the stimulus. This indicates obvious upside for Myer ((MYR)), Kmart and Target ((WES)), Big W ((WOW)) and potentially Bunnings (WES) and JB Hi-Fi. In 2004 there was a more modest example of household assistance, and footwear and recreational goods stood out as beneficiaries. Home goods and liquor stores also showed a noticeable uplift.

Platforms

Following several years of strong growth, funds under management on platforms declined -1% in 2018. Annual net inflows in 2018 were down around -80%. Flows into superannuation products were also weaker than flows into investment products.

Citi assesses continued weakness in platform flows is a function of the Hayne Royal Commission and the weakness in capital markets in the December quarter. There is potential for flows to improve now that the Royal Commission has been completed.

Credit Suisse observes large institutional platforms are facing competition on two fronts: industry funds are winning share from retail funds in corporate and default super, while specialist platforms are taking share within the advised market.

The slowing fund flows across the industry will make winning business from competitors even more important. Credit Suisse retains a preference for high-growth platforms such as HUB24 ((HUB)) and Netwealth ((NWL)).

UBS is also cautious about the earnings outlook for traditional platform operators as the cuts to fees echo across the industry. The broker notes, despite a second consecutive quarter of net outflows in December, specialist platform providers were able to capture inflows at the expense of the majors.

The broker points out IOOF ((IFL)), with market share of 6.7%, was the only major provider to grow adviser numbers over the year to date. This indicates a limited impact on the business to date from APRA's (Australian Prudential Regulatory Authority) December regulatory actions.

Citi was also impressed by superannuation flows for IOOF versus the rest of the industry in the December quarter. Retail industry net flows in the second half of 2018 was the worst in more than six years, the broker assesses, likely reflecting the disruption to the advice industry following the Royal Commission.

Yet IOOF defied industry to achieve superannuation net flows of $93m. Meanwhile ANZ Wealth retail net flows were down -$166m in the December quarter. Of the established operators, BT experienced a solid $1.1bn in total retail net flows, including $460m of superannuation flows, with the price reductions in 2018 likely to have helped.

Citi also notes specialists continue to gain share with Praemium ((PPS)) moving to number four in terms of the highest net flows for the December quarter. The broker expects the structural shift will continue and that Netwealth and HUB24 will more than double market share over the next five years.

Citi retains Neutral ratings on the latter two stocks because, although there is upside in market share, there is also downside envisaged for margins. The broker points out the top 10 players obtained $5.6bn of net inflows despite total industry net outflows, showing the extent of the churn of funds within the industry.

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DMP HUB HVN IFL JBH MYR NWL PPS WES WOW

For more info SHARE ANALYSIS: DMP - DOMINO'S PIZZA ENTERPRISES LIMITED

For more info SHARE ANALYSIS: HUB - HUB24 LIMITED

For more info SHARE ANALYSIS: HVN - HARVEY NORMAN HOLDINGS LIMITED

For more info SHARE ANALYSIS: IFL - INSIGNIA FINANCIAL LIMITED

For more info SHARE ANALYSIS: JBH - JB HI-FI LIMITED

For more info SHARE ANALYSIS: MYR - MYER HOLDINGS LIMITED

For more info SHARE ANALYSIS: NWL - NETWEALTH GROUP LIMITED

For more info SHARE ANALYSIS: PPS - PRAEMIUM LIMITED

For more info SHARE ANALYSIS: WES - WESFARMERS LIMITED

For more info SHARE ANALYSIS: WOW - WOOLWORTHS GROUP LIMITED