The Wrap: Dwellings, Currency & A-REITs

Weekly Reports | Oct 11 2019

Weekly Broker Wrap: dwelling starts; building materials; currency; grocery; and A-REITs.

-Latest dwelling starts imply downturn going forward
-JPMorgan suggests sales for CSR likely to slump
-Little support envisaged ahead for Australian dollar
-Foreign direct investment flows head back to Europe
-Deflationary pressures ease across the grocery market
-Pressure on A-REITs amid softening outlook for rental growth


By Eva Brocklehurst

Dwelling Starts

Second quarter dwelling commencements rose 1.1% but are still down -20.3% over the year. While private homes went backwards, down -16% year-on-year, the multi-unit and other dwelling category rebounded, albeit still down -26% year-on-year.

UBS notes, reflecting the prior boom, residential work under construction remains high but activity will fall sharply as annual completions drop to around 180,000 in 2020 from the current 217,000. This will also be a drag on consumption going forward.

Non-residential building commencements, meanwhile, were flat, down -18% year-on-year. The numbers imply a construction downturn going forward and UBS asserts, given sentiment has deteriorated, the Reserve Bank of Australia is likely to cut official rates by -25 basis points in November and again in the first half of 2020, taking the cash rate to 0.25%.

Building Materials

JPMorgan believes the latest building activity data, particularly residential commencements and completions, signals sales for CSR ((CSR)) will fall sharply in FY20. The broker forecasts CSR's building products revenue to decline -10%. Depressed spot aluminium prices will also impact on the profitability of the Tomago smelter, with JPMorgan noting the ingot premium for Japan has been trending lower.

The broker retains an Underweight rating on CSR and estimates for earnings per share in FY20 are -12% below consensus. JPMorgan expects dwelling commencements to continue moderating, presenting a tough back drop for Adelaide Brighton ((ABC)) as well.

Australian Dollar

UBS is bearish about the outlook for the Australian dollar, expecting it at US$0.66 by the end of 2019. Several factors are likely to apply the pressure, including lingering support for the US dollar. UBS doubts US dollar can weaken very much despite the fact US yields are fallen significantly.

Global growth is now in the 10th lowest percentile for the last 20 years and this backdrop tends to be supportive of the US dollar, not the least because US investors maintain a strong home bias in global downturns.

Weak global growth will also bring about risk aversion and the broker expects no significant de-escalation in the trade war. Moreover, UBS doubts lower interest rates will be bullish for equities over the more medium term, as eventually equities will have to adjust and catch up with weaker macro fundamentals.

As the RBA cuts rates further and the discussions centring on quantitative easing intensify, the broker expects the Australian dollar will retain a bearish tone. Finally, commodity prices are unlikely to offer much support for the currency. High iron ore prices are considered unsustainable and commodities are unlikely to cushion the impact of lower domestic rates and increased risk aversion.

Morgan Stanley points out the Australian dollar has not reacted to the drop in consumer sentiment, as indicated by the latest survey, implying markets are closely tuned to the US/China trade negotiations.

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