Weekly Reports | Jul 12 2019
Weekly Broker Wrap: service exports; supermarkets; retail; and online classifieds.
-Softer near-term outlook for Chinese tourism and education exports
-Coles strategy resonating with suppliers, UBS notes culture improving
-Better outlook for discretionary retailing
-Real estate listings, job advertising volumes remain weak
By Eva Brocklehurst
Australia's service exports have primarily centred on tourism and education and are currently worth around $8bn per month. While China has become the strongest contributor to visitor and student numbers coming to Australia, ANZ economists note growth has slowed rapidly.
The economists suspect the trade dispute with the US, and resultant political uncertainty, has contributed to the decline. The softness is expected to continue into 2020 when the trade dispute is likely to be resolved.
Despite this, there remains potential in the education and tourism sectors. China's middle-class is estimated to increase by another 370m people by 2030. While this should allow strong growth in tourism to Australia to return, there is not quite as much scope for growth in education.
As China continues to develop, its universities will also increase in quality and reputation. Once this happens fewer students will choose to travel overseas.
UBS has explored the strategic and tactical as well as cultural aspects of supermarket operations in its latest survey. The new strategy from Coles ((COL)) is resonating with suppliers and the culture looks to be improving, although there were no improvements in customer-facing drivers.
Meanwhile, supplier tensions are building for Woolworths ((WOW)) because of negative culture and relationship scores. Inflation is returning which is a positive for market growth and UBS believes Woolworths is executing best in this regard, although it needs to re-engage with suppliers or risk support moving away to its competitors.
Weakness in retail sales was broad-based in May, UBS notes, dragged down by food, household goods and apparel. Stimulus over the next 6-12 months should provide some impetus but the broker remains cautious about retailers directly exposed to housing such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)). The broker prefers Flight Centre ((FLT)), Treasury Wine Estates ((TWE)), Bapcor ((BAP)) and Viva Energy ((VEA)).
Citi considers the outlook favourable for discretionary retailing in FY20, for the first time since FY16. The basis for the broker's optimism relates to a combination of tax cuts, official interest rate reductions, falling living costs and a stabilising housing market. The broker has upgraded Flight Centre to Buy and JB Hi-Fi, Harvey Norman and Premier Investments ((PMV)) to Neutral, in taking a more positive stance on discretionary retail stocks.