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The Wrap: Employment Shocks, Consumer Sentiment And Housing

Weekly Reports | May 29 2020

Weekly Broker Wrap: Employment Shocks, Consumer Sentiment And Housing.

– Household Income to decrease along with an increase in the welfare safety net
– Spending intention of low-income earners supported by the JobKeeper stimulus
– Housing demand expected to bounce back
– Alternate finance is led by the Buy Now Pay later players

By Angelique Thakur

Employment shocks versus income shocks

The pandemic has rocked labour markets in many parts of the world. Australia is no exception with hospitality, recreation and realty sectors impacted the most so far.

Australia's unemployment stood at 6.2% by the end of the second week of May, but JP Morgan analysts believe the welfare safety net is distorting the actual jobless rate. They fear the true unemployment level may be much higher, between 8-14%.

Recipients of the JobKeeper benefits are counted as employed irrespective of the hours worked because the payments are channeled through firms, they point out. This gives an inaccurate picture of unemployment as only those who no longer draw an income are counted as unemployed.

The effect is less pronounced on wages and salaries as the Australian Taxation Office (ATO) measures weekly changes in total wages paid while JobKeeper payments are less than national average weekly earnings.

This is not to say the payments don’t have a visible impact, the analysts remark. JobKeeper has modified industry compensation for some sectors like hospitality where such payments are more than the average weekly earnings of the workers.

The team has tried to quantify the extent of the income shock and finds that, adjusted for seasonal variation, employee compensation (wages and salaries) declined -8% in the first quarter, most of it in the second half of March. The analysts expect wages and salary to fall -28% in the June quarter – that would be the largest fall since 1990.

Other constituents of the household income-rental income, dividends and interest – have also been adversely impacted by varying degrees. Overall, household income in Australia is expected to fall by -23% in the June quarter before recovering a little in the second half.

The analysts also anticipate an expansion of the safety net with a material rise in welfare payments in the second quarter.  They estimate welfare payments will increase by 173% or $10bn in the second quarter.

Consumer sentiment at the height of the pandemic

A survey aimed at understanding the pulse of the Australian consumer was conducted by UBS over the first half of April.

Among other findings, it highlighted the importance of JobKeeper which appears to be supporting the spending intentions of lower income earners.

The study found 39% of respondents have less than a month’s safety buffer in case they lose their jobs while 63% have less than six months of safety buffer.

Interestingly, even with income expectations reduced, consumers are willing to take on more debt in the next twelve months while expecting to save less, the survey finds. This was more apparent in lower income households.

Consumers are also more inclined towards purchasing used cars rather than new ones. In fact, new car sales plummeted to their lowest levels in decades in April. The UBS team feels this could bode well for Bapcor ((BAP)).

Property demand remains strong with 30% of consumers looking to buy within the next 12 months although house price growth is expected to fall. Listings have improved and the team recommends REA Group ((REA)) and Domain Holdings ((DHG)).

There is an increase in focus on home improvement and the team favours Wesfarmers ((WES)), Metcash ((MTS)), Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)).

Investors should move away from retailers reliant on in-store sales and focus on the ones with a strong online presence, advise the analysts pointing at JB Hi-Fi, Premier Investments ((PMV)), Adairs ((ADH)) and Kogan ((KGN)) as key picks due to their online presence.

With exposure to logistics considered a strong point, industrial REITs like Goodman Group ((GMG)) are preferred over the likes of Vicinity Centres ((VCX)) and Scentre Group ((SCG)).

The study also found younger respondents are willing to pay more for ESG outcomes. While 30% of consumers were willing to pay double for sustainably sourced goods, 20% claimed they would pay double for renewable energy.

Interestingly, a majority of the respondents were not willing to give up more than 1% of their retirement savings to invest in an ESG aware option.

A shift towards telehealth services

Medicare data for April show a decline in volumes in pathology, diagnostic imaging, surgeries and GP attendances. The one positive was Telehealth services which grew by around 35%.

Experts at Wilsons point towards radiology recovering the fastest with improving GP attendance and elective surgeries. Here, the experts consider Integral Diagnostics ((IDC)) likely to recover faster than Capitol Health ((CAJ)). 

Credit Suisse analysts express surprise at the resilience of pathology with the decline, at -25.5%, not as bad as expected. The analysts maintain a cautious stance, assuming a -40% pathology revenue reduction for Sonic Healthcare ((SHL)) and Healius ((HLS)) from mid-March to end-April and a further -15% expected for May-June.

Credit Suisse also notes the notable trend shift towards telehealth services, with a 12.5% increase year-on-year in GP attendance rates mostly attributed to this. The shift appears to be an enduring one, sense the Credit Suisse analysts, believing Healius should benefit the most.

The analysts are positive about Sonic Healthcare and Ramsay Health Care ((RHC)), while retaining a neutral stance on Healius.

The housing bounce-back

Low interest rates combined with better than expected covid-19 outcomes seem to point towards a bounce-back in housing demand in Australia.

This is in line with Macquarie’s above-consensus estimates. The analysts believe a stimulus for housing activity may be in the offing. On a similar note, the US surprised the analysts with April home sales slightly above March, strongly hinting at a recovery.

Keeping these points in mind, the analysts recommend James Hardie Industries ((JHX)), Reliance Worldwide Corporation ((RWC)), Brickworks ((BKW)) and CSR ((CSR)).

All stand to benefit from improving trends in either Australia or the US, or both, and have been rated outperform by Macqaurie.

The analysts are less keen on Adbri ((ABC)), formerly known as Adelaide Brighton, and Wagners Holding Company ((WGN)).

Infant Formula Market Heating Up

Chinese-owned Bellamy’s has launched a new organic infant formula called Beta Genica-8. The formula contains A2 certified organic milk among other high-end ingredients and is considered by Citi experts to be an advanced formulation.

Noting many ingredients missing from a2 Milk’s ((A2M)) English label formulation, the experts expect the company will need to reformulate if it is to remain competitive.

Citi suggests the launch highlights increasing competition within the A2-protein infant formula niche with a number of new players emerging in Australia and China over the last year.

Recent launches have taken place on e-commerce platforms rather than Mother & Baby Stores (MBS) and present a direct threat to a2 Milk, comment the experts.

Bellamy’s is also expected to launch an organic goat formula called Mim’s Gentle Milk Co in the second half. Citi says this will be in direct competition to Bubs Australia’s ((BUB)) goat formula, more so as it is priced at a discount, and will make Bellamy’s product the cheapest in the Australian market.

The saving grace is the launch will take place on O2O (online-to-offline) channels and social commerce. The experts fear if the product is launched at the same price in retail channels, it will threaten Bubs and other brands.

Reinsurance reassurance

QBE Insurance’s ((QBE)) steps to reduce earnings volatility through three additional reinsurance covers could not have come at a better time, with an above-average 2020 Atlantic hurricane season predicted.

Analysts at Morgan Stanley comment these covers, under-appreciated by the market, reduce QBE’s exposure to hurricanes, amongst other things.

On the flip-side, they fear the hurricane season could push reinsurance prices upward, exposing other general insurance players to higher pricing.

In light of this, the analysts view the Suncorp Group ((SUN)) to be vulnerable while Insurance Australia Group ((IAG)), with multi-year quota share agreements in place, is relatively better off.

Alternate finance – Buy Now Pay Later leading the race

A study of alternate finance, collections and fintech companies by Shaw and Partners points at better than expected credit performance backed by stimulus measures and a “Team Australia” approach. The analysts also noted no major increase in bad debts in the industry.

Growth has slowed down and excluding the BNPL (Buy now pay later) category, alternate finance stocks declined by -44% during the pandemic, underperforming the Small Ordinaries index by -53% till March, recovering gradually thereafter.

BNPL credit is soaring on the back of a structural shift. The broad slowdown in the alternate finance industry also presents opportunities for both Zip Co ((Z1P)) and Afterpay ((APT)), highlight the analysts.

Zip Co, a key pick, has ramped up volumes due to a shift towards the online channel and is expected to continue grabbing share from mainstream providers.

Residential mortgage backed securities (RMBS) providers – Australian Finance Group ((AFG)) and Resimac Group ((RMC)) – witnessed a drop in securitisation issuance and the analysts note near-term conditions will remain tough.

Some stocks to watch out for, according to Shaw, include the Eclipx Group ((ECX)), with the analysts forecasting improvement in volumes, while in the collections space, Credit Corp ((CCP)) is preferred due to its strong position.

Money3’s ((MNY)) collections and cash flows have set a record and the analysts expect cashflows and profit to come out ahead of pre-pandemic expectations.

FlexiGroup’s ((FXL)) growth is expected to be minimal, as this company is also exposed to offline channels and traditional merchants. The analysts expect the Flexigroup narrative to change post reopening of the economy.

Other picks include Wisr ((WZR)), Sezzle Inc ((SZL)) and Moneyme ((MME)).

Shaw analysts believe stimulus measures will continue, expecting more changes to be announced in June, possibly increasing their scope.

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