Weekly Reports | Dec 06 2019
Weekly Broker Wrap: cash rate; housing; consumer; port volumes; health insurance; and financial advisers.
-NAB analysts include an additional cut to cash rate forecasts
-House price growth to moderate, credit growth subdued
-UBS finds consumer outlook positive for home improvements and fast food
-Australian port volumes weaken
-Financial adviser numbers continue to dwindle for major operators
By Eva Brocklehurst
Cash Rate Outlook
National Australia Bank analysts include an additional -25 basis points reduction to the Reserve Bank of Australia's cash rate in forecasts. Cuts are expected in February and June 2020, taking the cash rate to 0.25%. From there, the analysts expect an increased risk of unconventional monetary policy in the second half of 2020, should the labour market weaken more significantly.
The NAB forecasts are for below-trend growth, and a deterioration in the unemployment rate with inflation firmly below the RBA's target band of 2-3% over the cycle. This implies the need for policymakers to do more. The analysts remain more optimistic on public spending vs the RBA's forecast but expect the household sector and business investment to be notably weaker.
Australian house prices grew in November at the fastest pace since 2003. Morgan Stanley notes national house prices are now up 5.7% from the June 2019 trough. Detached house prices grew faster than apartments and, by city, Sydney led the way.
The broker expects price growth to moderate into 2020, based on a view that credit constraints will be a deterrent. Credit growth remains very subdued and investor lending growth is negative. Investor loan approvals have typically been important for the housing cycle and house price growth.
In contrast, building approvals have fallen to a seven-year low. Building approvals are down -23.6% from a year ago, and in trend terms are annualising at 158,000, the weakest level in over seven years. While the broker expects approvals will trough early in 2020, the lags in the construction cycle mean activity will still decline through 2020 and be a drag on both jobs and activity in the economy.
UBS found results, overall, in its consumer outlook survey were positive, particularly in home improvements and fast food. Travel intentions were slightly softer, although key brands such as Flight Centre ((FLT)) and Webjet ((WEB)) are winning share. Superior sites and improved pricing have reinforced the broker's view on the volume opportunity in fuel & convenience at Viva Energy ((VEA)), while for Wesfarmers ((WES)) the home improvement indicators are resilient.
Online shopping intentions in the survey were also strong and rising, particularly for local brands. Meanwhile, the results were slightly negative for Domino's Pizza ((DMP)) as aggregators are growing rapidly and there is a risk the company may not be able to hold share.
Citi notes Australian retail expenditure has been sluggish since a small uptick in August after the federal government's tax cuts. It appears households are paying down credit cards faster than usual, which may be positive for spending in November and December. The recent increase in house prices also points to improving sales growth in the first half of 2020.
Citi has reviewed recent APRA data which shows household deposits grew by 7% in the four months to October, a similar pace to the 3-year average of 6%. It appears that, while bank accounts have not ballooned, credit card balances have been reduced by -6% over the period.
The broker also suggests the short-term rise in the savings rate in the September quarter may unwind if house prices continue to rise. Meanwhile, there appear to be some pockets of strength Citi has noted in retail sales anecdotes. In particular this includes consumer electronics, groceries and sporting goods.
Container movements at Australia's four major ports are down on average -5.6% in the first half of FY20 to date. Citi asserts this is the worst performance for a half-year since the second half of FY09. Weakness was characterised by a drop in both exports and imports. Empty container movements are experiencing the largest declines, down -12.1%.
Qube Holdings ((QUB)) has noted weaker industry volumes for Patricks. If sustained, lower industry volume growth and spare road freight capacity are likely to put downward pressure on industry pricing and margins, Citi suggests.
The broker believes the current share price is reflecting optimism about the long-term success of the company's Moorebank project and is yet to reflect the emerging risks to operating earnings from weaker industry growth in FY20. Citi has a Sell rating on the stock with a $2.70 target.
UBS believes more detail is required on the new private health insurance capital standards in order to assess the impact. The proposals are designed to bring the capital framework in line with standards in general insurance and life insurance, both in terms of assessing capital requirements and permissible regulatory capital.
UBS suspects some participants may be more affected than others, such as nib Holdings ((NHF)) versus Medibank Private ((MPL)), although the extended implementation timeframe should enable both to assess shortfalls gradually. With margins under pressure, UBS maintains a Sell rating on both stocks.
The largest six financial advice operators, i.e. the four major banks plus AMP ((AMP)) and IOOF Holdings ((IFL)), have collectively lost -28% of their advisers so far in 2019, Bell Potter notes. Westpac Bank ((WBC)) is now officially out of the advice market while IOOF is selling its Ord Minnett business.
There is also recent media speculation that signals ANZ Bank ((ANZ)) is considering exiting its remaining advice business, that was not sold to IOOF. Bell Potter expects the move to independence will continue, now the regulatory landscape is becoming clearer following the release of the Royal Commission report. The broker also points out both AMP and IOOF are behind in their remediation programs.
The definition of a financial advisor on the ASIC (Australian Securities and Investments Commission) register puts emphasis on the term "relevant financial product", the broker explains. This is also defined as "all financial products other than basic banking products, general insurance products, consumer credit insurance or a combination of any of these products".
Those professionals who qualify under this definition can be financial planners & private bankers, stockbrokers or SMSF (self managed super fund) advisers. These do not include institutional/wholesale advisers, general advice mortgage brokers and direct channel/insurance sales representatives.
The register, which includes around 25,000 financial advisers in Australia, provides the best measure of the total exposure to retail customers in the market, Bell Potter contends.
The broker also notes a trend in recent years to move towards self-licensing, as opposed to operating under a dealer group banner, which allows advisers a greater level of freedom. Dealer groups facilitate collective bargaining power and reduce the operating burden but the flexibility of each varies.
Meanwhile, the Australian superannuation system has underpinned the financial advice sector, at $2.87 trillion as of June 2019. Bell Potter estimates it will reach around $3.64 trillion by June 2022. Industry funds are closing in on the top spot in super, growing market share by 1.8% over the last year while SMSFs shrank by -1.6%.
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