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The Wrap: The Economy, Afterpay & Supermarkets

Weekly Reports | Feb 05 2021

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Australia expected to grow by 5% in 2021; Afterpay scores high on loyalty; bank earnings upgrades; supermarkets most trusted

-World growth expected to lift by 5.5% in 2021: IMF
-Afterpay: More preferred with a loyal customer base
-Bank earnings upgrade cycle
-Woolies and Coles: Most trusted by Australians

By Angelique Thakur

2021: A year of healing 

With covid vaccination programmes on the roll-out on top of supportive policy measures (including from the new Biden Administration and the US Fed), Janus Henderson believes 2021 will be a year of recovery for Australia and other economies.

The International Monetary Fund (IMF) expects world growth in 2021 to rise by 5.5% after falling by -3.5% in 2020. The Australian economy is expected to lift by 5% in 2021, a feat Janus Henderson believes should see the country return to the same size it was by the end of 2019.

Consumer Price Index (CPI) was stronger than expected in the December quarter with higher childcare costs and tobacco prices the prime victims. However, Janus Henderson reckons most price gains were led by policy decisions rather than stronger demand.

This view is further supported by reports of spare capacity in the economy, which together with weak wage growth trends and a stronger currency, are likely to keep a lid on medium-term inflation.

In the near-term, Janus Henderson believes prices may lift temporarily as strong consumer demand meets low stock levels.

The global and domestic yield curve (cash 10-year spread) has steepened since late-2020 with the markets factoring in a cyclical rebound. Janus Henderson is of the view that while some curve steepening should be expected given the improved outlook, one should also remember markets can get ahead of themselves.

Market conviction in the recovery story is high with five-year forward rates, a proxy for the longer-run cash rate in the US, rising back to pre-covid levels and in Australia’s case, to levels not consistently seen since mid-2019.

US: The next BNPL battleground

Afterpay ((APT)) is the uncrowned king of the buy now pay later sector (BNPL) with consumers from Australia, US and Canada preferring the company’s services over those of its competitors.

Afterpay users are also more loyal and less likely to switch, unlike users of Sezzle Inc ((SZL)) or Quadpay.

These are some of the key findings of a Citi-led consumer survey in Australia, Canada, United Kingdom and United States with more than 13,000 respondents who currently use or plan to use BNPL services.

With penetration levels low compared to Australia, the US is likely to be the next battleground on which the BNPL sector war will be waged, reports the survey. Citi believes both Afterpay and Zip Co ((Z1P)) will see high levels of growth in the US.

Consumers in the US are also willing to pay more, with 70% of respondents stating they would continue with BNPL services even if they had to pay a fee. On the flip side, only 50% Australian respondents are willing to shell out more money.

The BNPL companies would do well to focus their attention on services, advises Citi, with 70% of the respondents showing an inclination to use BNPL for services like hair-dressers and restaurants. This, in particular, bodes well for Quadpay given its “Shop Anywhere” offering can be used for in-store transactions.

The survey also threw light on a significant section completely unfazed and indifferent to the charms of the BNPL sector. Around 33% of the respondents showed no interest in trying out BNPL.

Surprisingly, most of the respondents were from the UK and Australia which have seen a higher penetration of BNPL services.

Earnings upgrades in store for the banks?

The cyclical environment for the banks is improving, assert UBS analysts, and should provide attractive dividends and buy-backs through 2021. Moreover, the prospects for banks are likely to be boosted by rising inflation and interest rates expectations and could see further re-ratings in the sector.

The last two months have seen consensus earnings upgrades for Australian banks – the first since 2015. An unusual but expected occurrence, notes UBS, given economic data has been consistently stronger and the outlook for bank credit has been improving.

UBS suggests the upcoming results will likely serve as catalysts for consensus to further reduce expected credit impairment charges which will ultimately flow through to stronger earnings, dividends and capital forecasts.

The broker has high expectations from Commonwealth bank ((CBA)). ANZ Bank ((ANZ)) is also expected to see its share rise in mortgages. Expectations remain subdued for Westpac Bank ((WBC)).

Woolies and Coles: Australia’s most trusted brands

Woolworths Group ((WOW)) and Coles ((COL)) have nudged out Bunnings and Aldi to emerge as the two of the most trusted brands in Australia.

On the other hand, the collective ire of more than 10,000 Australians ensured Rio Tinto a place in the top 10 most distrusted brands.

These are some of the results of Roy Morgan's latest survey that tracks trust and distrust levels in brands across 25 industry sectors. Its latest report titled Risk Report: Covid shows the two supermarkets’ ascent to the top, pushing both Aldi and Bunnings down the ladder to third and fourth positions.

When it comes to trust, Coles moved up the most in 2020, rising by three ranks by May 2020 before moving another two ranks during the peak covid period between April and September and ending up right beside Woolworths.

The ascent was no doubt helped by the pandemic-led spike in demand for essential items. 

Apple and Microsoft emerged as some of the most trusted technology brands – not surprising since relying on technology was how most of us managed to cling to sanity while stuck indoors.

Facebook has the notorious distinction of being the most distrusted brand followed by Telstra. Some new additions to the list were Amazon, Huawei and BP.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

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For more info SHARE ANALYSIS: COL - COLES GROUP LIMITED

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For more info SHARE ANALYSIS: WBC - WESTPAC BANKING CORPORATION

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