Weekly Reports | Jan 24 2020
Weekly Broker Wrap: bushfires, coronavirus, Kaufland, building materials, and global wild cards.
-Bushfires increase potential for an RBA rate cut and downgraded economic outlook
-Economic impact of coronavirus dependent on seriousness and duration of outbreak
-Kaufland exit suggests food inflation is likely to persist
-Brokers see value in building materials stocks exposed to the US
By Eva Brocklehurst
The value of insurance claims for the recent catastrophic bushfires is approaching that of the 2009 Black Saturday bushfires. UBS estimates this could drag on Australia's GDP by -0.25% per quarter for the fourth quarter of 2019 and first quarter of 2020.
The sectors likely to be hit hardest include agriculture, retail, tourism and construction, although the impact is difficult to determine. The federal government has announced a $2bn relief package over three years with an indicative $500m to be spent this financial year. The expected budget surplus of $5bn is unlikely to be at risk.
UBS believes stocks with exposure to retailing, insurance, food & beverage and transport will sustain the largest negative effects while resources, building materials and infrastructure are likely to be marginally affected.
Overall, UBS suspects the bushfires increase the likelihood of an official rate cut from the Reserve Bank of Australia in February and expects a reduction of -25 basis points ahead of the downgrade to the economic outlook in the February statement on monetary policy.
Chinese stocks have fallen over the past two days as market participants become increasingly aware of the potential economic damage of the coronavirus. Ultimately, Commonwealth Bank analysts believe the economic impact will depend on both the seriousness and duration of the outbreak.
So far there is no vaccine for the virus. The situation has been aggravated by hundreds of millions of Chinese travelling around the Lunar New Year between January 24 and January 30. This could accelerate the spread of the virus.
The analysts believe there are some reasons for optimism compared to the SARS outbreak in 2003. SARS caused a temporary recession in Hong Kong because of its heavy reliance on tourism and trade, although the coronavirus outbreak could exacerbate Hong Kong's recent economic slump caused by the China/US trade dispute and social unrest.
However, this time around the most-affected local economies are relatively small. Hubei province, where the outbreak was first noted, accounts for only 4% of national GDP. Secondly, China's health system has improved since 2003 and experience has been gained in dealing with SARS and the outbreak of bird flu in 2013-14.
The analysts believe the virus will have little direct impact on industrial production and investment because factories and construction sites are likely to be shut during the period. Retail sales and food inflation are the main indicators to watch to measure the impact on consumer spending.
Nomura expects increased downward pressure on China's growth, particularly in the services sector if the infection rate expands. Despite a large deterioration in the services sector, the analysts agree the adverse impact of SARS was less severe on industrial production, property, exports and fixed asset investment.
The main focus for the near term is around new infections and whether mortality rates change. If not then Nomura expects the market will increasingly shift back to focus on an economic and semi-conductor recovery.
If mortality is worse then markets will focus on what happened with SARS. Back then there was significant selling pressure in equity markets and currencies were sold off against the US dollar while interest-rate curves in Asia flattened.
Under similar conditions, Nomura would expect most of the pressure would be concentrated on the renminbi and Korean won. If infections expand in the region then the Singapore dollar and Thai baht could suffer.
If the disease cannot be contained in the short term, UBS expects China's retail sales, tourism and travel-related activities will be hit. Forecasts of growth rebounding would then face some downside risk. However, importantly, the broker believes China has learnt valuable lessons from the SARS outbreak.