The Wrap: Wealth, A-REITs And Yield Stocks

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Weekly Broker Wrap: wealth managers; IP services; A-REITs; Australian macro outlook; and yield stocks.

-AMP, IOOF need to reposition or risk continuing outflows, in Morgan Stanley's view
-Volumes still appears solid in IP filings over 2019 to date
-Coles' strategy a loser for shopping centres
-Downside risk to market sentiment may be under-appreciated
-Search for yield intensifying, a factor in the outperformance of the ASX 200
 

By Eva Brocklehurst

Wealth Managers

Morgan Stanley believes AMP ((AMP)) and IOOF ((IFL)) have no choice but to reposition their businesses or risk continuing outflows and declining margins. This is likely to take three or more years.

The broker assesses wealth managers need to rebuild a focus on customers and advice and simplify their offering. This comes amid new regulation which involves the elevated role of the trustee and heightened scrutiny of client best interests. There is also the impact of new technology and the digital, scaled advice solutions.

The broker downgrades AMP to Underweight and retains an Equal-weight rating for IOOF. The longer-dated nature of superannuation traditionally meant consumers were largely disengaged now, post the Royal Commission, this has changed and there is elevated switching, with industry funds the major beneficiaries.

IP Services

Bell Potter notes that in the five months to May 31, the number of patent applications filed with IP Australia was flat, albeit the previous May data was particularly strong. The number of directions issued for the period was up 30.9% and examination requests up 13.9%.

Overall, while growth in filings is muted, the broker still believes volumes are solid. Examination indicators also bode well for workflow in the next 12-24 months. The broker retains Buy ratings for IPH ((IPH)) and QANTM IP ((QIP)) and a Hold rating for Xenith IP ((XIP)), as the takeover offer from IPH appears reflected in the price.

A-REITs

The A-REIT sector has performed well this year, Macquarie observes, principally on the back of record low bond yields. However, within the sector there is divergence, and the broker assesses it will be difficult for retail A-REITs to rally against a backdrop of falling rents, rising capital expenditure and limited demand for shopping centres in direct markets.

The broker's preferences, therefore, lie with Goodman Group ((GMG)), Charter Hall ((CHC)), Lendlease Group ((LLC)) and Stockland ((SGP)). Additionally, Macquarie believes the strategy outlined by Coles Group ((COL)) is bearish for shopping centre owners. That company has made a conscious effort to slow growth in supermarket space and target refurbishments. There is also a focus on costs and improving the online offering.

Coles will tailor around 40% of store layouts towards the demographics of the area and focus on large format stores in greenfield growth corridors. Smaller infill stores below apartment towers will also be a focus. Hence, Macquarie asserts, the shopping centre as the key conduit between retailer and customer has ended, and this does not bode well for the segment.

Australian Macro Outlook

Morgan Stanley notes the ASX200 is up 18% so far in 2019 in local currency terms and 16% in US dollar terms. While the broker appreciates a shift in sentiment, recent data confirms challenges remain.

Several factors have combined to drive the upside and the broker counts lower tail risk, resulting from the Coalition victory in the federal election, and the stimulus from the Reserve Bank's reduction to official rates as key features of the rally in the index.

There is also regional rotation and the hunt for yield, both of which has brought a focus back to Australia. Iron ore leverage is also in play. Still, Morgan Stanley believes the downside risk to sentiment remains under-appreciated.

Yield Stocks

Ord Minnett notes the search for yield is intensifying, with global bond yields at or near all-time lows. The broker agrees this is particularly intense in Australia, where yields are among the highest in the developed world and this yield appeal has been an important factor in the year-to-date outperformance of the ASX200.

There is evidence of yield-seeking activity on the registers of major banks, where exchange-traded funds account for an increasing share, and the broker observes many high-yielding companies are now stretched on valuation grounds.

The broker's economists expect the Reserve Bank to cut the cash rate by a further -75 basis points by mid 2020, taking the terminal rate to 0.5%. This would drive further capital flows towards high-yielding sectors.

Ord Minnett flags stocks that represent a combination of attractive three-year average yields combined with a positive bottom-up view. These include Fortescue Metals ((FMG)), Vicinity Centres ((VCX)), Pendal Group ((PDL)), Woodside Petroleum ((WPL)), BHP Group ((BHP)), Stockland, GUD Holdings ((GUD)), ANZ Bank ((ANZ)) and Westpac Bank ((WBC)).

Major banks have recovered some ground in 2019, although have underperformed the index by around -300 basis points. Ord Minnett observes a short-term tactical appeal in the sector and prefers National Australia Bank ((NAB)), rated Accumulate.

Elevated iron ore prices are also supporting expectations for high short-term dividends from BHP Group, Fortescue Metals and Rio Tinto ((RIO)). The broker forecasts a declining dividend profile, while its three-year distribution estimates are well above the market. Yield spreads for resources and energy are noted to be the highest in the ASX200 index.

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