The Wrap: Jobs, Savings Rates, Banks, Travel

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Weekly Broker Wrap: Labour shortages, savings rates in double-digits, banks beat the market, travel winners & losers

-Upward pressure on construction/mining wages
-RBA likely to hike ahead of 2024 guidance
-Major global spend of accumulated savings predicted
-Bank outperformance the market by 18% year-to-date
-Travel stocks not all equal

 By Mark Story

Labour shortages: Mounting wage pressure

Assuming international borders remain closed until mid-22, Jarden expects unemployment to fall to 4.5% by the end of 2021 and 4% by the end of 2022. However, Jarden believes a lack of skilled labour presents downside risks which could see hiring slow below the broker’s modest 1.5% year-on-year forecast.

Driven by strong demand and lack of foreign arrivals, Jarden analysis suggests labour shortages are most pronounced in agriculture, construction, hospitality and mining. But the broker notes there are also reports of skills shortages in finance/professional services, technology, retail, and transport/logistics.

Jarden is witnessing upward pressure on construction and mining wages, with some channel checks suggesting professional and mining services are seeing cases of wage rises of up to 10%-plus. The broker also expects wage increases to eventually emerge in a number of sectors, including hospitality and agriculture, if seasonal workers don’t return.

While these four sectors only represent 20% of employment, Jarden expects skills shortages to put upward pressure on wages across the economy. Given that 36% of the CPI basket is 'labour sensitive', the broker suspects this wage pressure will eventually flow through to higher inflation outcomes and see the Reserve Bank hike ahead of 2024 guidance.

While UBS doesn’t forecast wages to jump above 3% year-on-year, the broker has upgraded forecasts to 2.5% from 2.3% by the end of 2022, which would be the fastest since 2014.

Due to the lag in the real economy, and weak public wages, UBS does not see materially stronger year-on-year wage growth until the second half of 2022. Adding to the broker’s conclusion is the Fair Work Commission annual wage review which is expected to remain low at around 2%.

To see wages increase 3%-plus year-on-year by the end of 2022, UBS thinks private sector wages would need to do the heavy lifting given they comprise 77% of the wage price index.

However, the broker concedes, the rapid pace at which the labour market is forecast to keep tightening is another reason why wages might surprise higher. The underutilisation rate dropped in April to 13.3%, the lowest since February 2019, and UBS expects it to fall -4.2 percentage points in the 2 years to December 2022.

Overall, the broker thinks the RBA is likely to wait for outcomes of wages and inflation, and is unlikely to quickly follow the RBNZ signal to hike the cash rate based on forecasts.

UBS still sees the cash rate unchanged over the forecast profile until at least the end of 2022. However, the broker also sees a risk of the RBA abandoning their yield target in 2022, which would enable them to hike in 2023.

Savings rates: Spending sprees pending

Covid-induced lockdowns, fear of catching the virus, coupled with concerns about becoming unemployed or being unable to work by default resulted in savings rates across the world reaching exceptional levels. According to Shaw and Partners June Infocus update, various US government support programs, which boosted personal disposable income, led to a surge in the personal saving rate to over 30% in April last year.

Personal savings rates also remained well above 10% during the rest of the year.

It was a similar savings story in other countries too. Within the eurozone and the UK, consumption and income growth both fell in the second quarter of 2020, despite government programs to support the economy.

Given that much of the unprecedented savings experienced globally were ‘forced savings, Shaw’s Infocus update suggests households will want to spend all the saved funds quickly once they are able to do so. But rather than focusing on whether the increase in savings occurred because households were unable to spend or not, the broker thinks it’s better to think of these savings in terms of their wealth effects.

The wealth effect, adds Shaw, also suggests households will want to increase future spending, hence are unlikely to spend all their current savings. Given that households are likely to want to reduce their indebtedness, Shaw doubts consumption will rise one-for-one with household savings.

What’s clear to Shaw from the research is there will be clear winners and losers when to it comes to how consumers splash their savings. For example, while an increase in wealth leads to a temporary surge of purchases of durable goods, Shaw suggests the purchases of non-durable goods, such as food, are unlikely to rise sharply.

While it’s unlikely that all the savings will be spent quickly, Shaw suspects as vaccination campaigns across the world lead economies to reopen, consumers will respond by spending some of their accumulated savings. As a result, saving rates will reduce closer to their normal levels.

Given that it is a large part of GDP, Shaw expects the pending boost in consumption spending to boost to the global economic recovery.

Oz banks beat the broader market

Banks outperformed the broader market by 5% in May, bringing their year-to-date outperformance to 18%.

Macquarie notes the positive thematic around improving credit quality, volume growth and capital management appears to be well understood. As a result, the broker doesn’t expect these thematics to drive further significant share price re-rating.

However, while the “easy money” has been made, tenable relative valuations and an absence of negative catalysts suggests to Macquarie that’s it is too early to go underweight on the bank sector. The broker retains a neutral sector view with a preference for the regionals over the majors.

While banks have started to talk about early green shoots in business credit, Macquarie notes that the growth rates remain subdued. In this context, the broker continues to expect housing credit to drive balance sheet growth in FY21, with the regionals continuing to benefit from this thematic as they grow share well ahead of the majors.

Macquarie believes the majors should continue to benefit from deposit mix changes, with the overall impact on margins from liability pricing likely to diminish in the second half of 2021. However, the broker’s analysis suggests the benefits for the regionals is ongoing, and expects more supportive margin trends in their upcoming results.

When looking specifically at the Big Four, the broker observes that Commbank’s ((CBA)) mortgage franchise continues to outperform major bank peers. ANZ Bank’s ((ANZ)) performance continues to disappoint after a strong first quarter 2021.

Anecdotal evidence suggests less attractive pricing and processing issues are at the centre of ANZ’s issues while National Australia Bank ((NAB)) and Westpac ((WBC)) continued to improve, growing at 0.7x and 0.8x system, respectively. Macquarie understands both banks relied on competitive pricing to drive an uplift, which is likely to impact future mortgage margins.

Meantime, the regionals continued to take share with Bendigo & Adelaide Bank ((BEN)) and Bank of Queensland ((BOQ)) growing at 2.5x and 2.0x, respectively, which, when coupled with favourable deposit tailwinds, the broker believes bodes well for their earnings in FY21.

Travel: Early post-covid winners & losers

Citi expects the nuances associated with the business models of travel stocks to produce materially different profit recovery times. Having concluded that they’re earlier beneficiaries of the recovery cycle, and after assessing how much of the recovery is already priced into each stock, the broker’s favoured travel companies are Corporate Travel Management ((CTD)) and Qantas ((QAN)).

Citi has initiated coverage on Corporate Travel as a Buy and views it as having the fewest headwinds, a net cash balance sheet and an attractive relative valuation (target price $23.65). The broker expects Corporate Travel’s earnings to come back the quickest, as it’s automated booking fee business model suits the current environment.

Additionally, the broker notes the company has used the crisis to make an accretive acquisition in the US, which is one of the fastest recovering geographic regions globally.

Given that Qantas’ domestic business has strong economics which should be profitable near term, the broker also has a Buy on the airline (target price $5.89). With the competition’s product offering dropping away, Citi has already seen market share gains.

Given that the leisure business relies on complex multi-destination trips to increase ancillary sales, Citi expects uncertainty around borders and the resumption of international travel to directly impact Flight Centre ((FLT)). With the recent sell-off capturing Flight Centre’s issues in the valuation, Citi retains a Neutral rating on the stock (target price $16.55).

Having analysed each travel stocks underlying global exposure, the broker determines Webjet ((WEB)) has the least favourable exposure on a relative basis. Despite Webjet’s heavy domestic focus and the tailwinds of increased adoption in e-commerce, Citi expect WebBeds to be slower to recover.

The broker believes Webjet’s exposure to middle income/less developed economies and long lead time, plus low cancellation rate travel bookings to be out of favour within the current environment.

Citi is High Risk rated on Webjet given this large section of the business is still burning cash. However Citi has a Neutral recommendation (target price $5.27) as the broker has seen management’s strong track record of pivoting a business quickly, and believes the company has adequate liquidity.

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