The Wrap: Global Recovery, Offices And Residential Care

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Weekly Broker Wrap: Global growth recovery, energy consumption, office property and residential care

-Best case scenario for global GDP growth is -3% for 2020 with Australia’s GDP contracting -6.1%
-Commercial electricity demand gap filled by households albeit with higher credit risk
-Sydney office properties to experience more headwinds
-Westpac turns focus to core banking business
-Mortgage servicing players in the US and the UK market expected to weather the storm well
-The one-time package for residential care not enough to handle medium-term risks.

By Angelique Thakur

Covid-19 And Global Growth Scenarios

Economists at UBS predict global growth for 2020 to be circa -3%, weakest since the Great Depression. What is notable is this is the best-case scenario, and depends on restrictions being lifted in mid-May with resumption of daily activities by June-end. If all goes according to plan, we could see growth recover sharply to 5.2% in 2021.

Many major economies are expected to post record GDP contractions in the second quarter and, not surprisingly, Australia awaits a similar fate, with the economists forecasting a -10% drop in the second quarter, estimating the economy to contract -6.1% in 2020 before recovering 5.2% in 2021.

A more conservative scenario projects delay in easing restrictions to June end with global growth lower at -4.5% this year before improving in 2021.

Another outlook, which is downright scary, sees containment measures failing with the virus coming back in waves until mid-2021. This scenario pegs growth for 2020 at an abysmal -5.1% with a weak L-shaped recovery of about 2.3% in 2021.

Even in the best-case scenario, it is only the domestic restrictions that would be relaxed, with border constraints expected stay in place till next year, reminds the broker, noting this would impact migration.

Needless to say, such scenario has grim consequences for Australia, which is heavily reliant on foreign investment and migration and also does not bode well for housing, remarks UBS.

With a household debt-to-income ratio that is among the highest in the world at circa 200%, Australia may see an income recession quickly turn into a more damaging balance sheet recession, warns the broker.

Energy Retailers: No Covid-19 Related Fallout

Electricity demand leading to the March quarter remained surprisingly stable, with the slight reduction a result of milder temperatures and increased rooftop solar rather than a fallout of covid-19.

Demand vacuum from commercial quarters has swiftly been filled by households. This is a double-edged sword as smaller customers pose more credit risk, comments stockbroker Morgans.

Morgans calculates the margin difference of selling one MWh of energy to a retail customer versus a large business customer to be about $30/MWh. Lower margins coupled with rising unemployment could lead to a sharp increase in bad debts.

Morgans is optimistic about both AGL Energy ((AGL)) and Origin Energy ((ORG)), noting their strong balance sheets would be enough to weather the proverbial storm.

The broker considers AGL’s customer mix resilient while the same cannot be said about Infigen Energy ((IFN)) which is finding commercial and industrial contract growth difficult to manage in the volatile electricity market.

Sydney Office Markets- A Grim Outlook

Things look grim for Sydney’s office markets with plenty of headwinds ahead. A recent study by Macquarie correlating GDP growth, unemployment, and the fall in office rents estimates global GDP growth would fall -8% by June 2020, returning to pre-covid-19 levels within 15 months (quicker than the GFC’s 21 months).

Unemployment is expected to rise to circa 9% but would reduce to 6% within the next two years. Overall, office vacancy rates are expected to climb to about 9% by December 2020 with net effective rents hit by around -15-25%.

The broker downgrades Mirvac Group ((MGR)) to Neutral and is keen on the Dexus Property Group ((DXS)), GPT Group ((GPT)) and Charter Hall Group ((CHC)).

A Structural Shift In Wealth Management Platforms

Westpac is keen on focusing on its core business, a point underscored with the bank deciding to move its wealth platforms business (including Panorama) into a Specialist Businesses division, even hinting at the possibility of selling some in the future.

The resulting uncertainty would be beneficial for Netwealth ((NWL)) and Hub24 ((HUB)) in the short term, expects Citi, while from a medium-term perspective, the impact could be positive if it leads to industry consolidation.

Citi is positive about both Netwealth and Hub24, expecting the structural shift to lead to strong medium-term earnings. Both platforms are expected to benefit from easing margin pressure due to reduced competition along with stronger balance sheets, which place them in a better position in case of any cost cutting measures.

Mortgage Servicing Industry – This Cloud Has More Than One Silver Lining

Mortgage servicing industries in the US and the UK are expected to face challenges in the short-term with forbearances in the US reaching 7.5% at the end of April, up from 2.7% at March end and expected to increase in May.

Mr Cooper, a key mortgage services player in the US, expects forbearances to reach nearly 20% by mid-June 2020. Broker Credit Suisse foresees earnings impacted till FY21.

Both Computershare ((CPU)) and Link Administration ((LNK)) have a sizeable exposure to the mortgage servicing industry in the US and UK, with about a quarter of Computershare’s earnings coming from the US and the UK, while the mortgage industry in Europe forms about 20% of Link Administration’s earnings.

Through adversity comes opportunity. The aforementioned challenges have opened up new opportunities in the form of a rise in demand for specialist loan servicers due to an increase in non-performing loans. Also, the prevailing low mortgage rates environment provides the chance to acquire long-term sticky mortgage servicing rights (MSR) with a materially lower pre-payment risk.

Residential Aged Care: Headwinds Ahead

The Federal Government announced a one-off package of $205m for aged care facilities to deal with covid-19 related costs. This includes a per occupied bed amount of $900 for metropolitan facilities and $1350 for the regional ones.

The package would boost revenues for Regis Healthcare ((REG)), Estia Health ((EHE)) and Japara Healthcare ((JHC)) by around 1% each, JP Morgan forecasts. UBS feels the package gives enough room to deal with the situation at hand. Even then, the underlying funding growth would be less than growth in costs and would hit FY21 margins, predicts JP Morgan.

Both UBS and JP Morgan are neutral on the three ASX-listed healthcare stocks with the near-term risks offsetting any long-term opportunity. UBS anticipates a rocky medium-term environment involving unemployed households coupled with low property market transactions.

Consequently, both brokers expect a shift away from refundable accommodation deposit (RAD) inflows.

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