Weekly Reports | Jun 11 2021
Weekly Broker Wrap: Higher loan rates pending, corporate earnings push higher, retail sales boom over, BNPL consolidation issues
-Higher fixed rates may offset APRA’s need to intervene
-Multiple effective vaccines have sent global equities above pre-pandemic levels
-Value-cyclical sectors, energy and financials have both surged over 50%
-Retail sales stalling, BNPL rising
By Mark Story
Oz housing: Rates to rise in second half
APRA Chair Wayne Byres recently advised a senate testimony “that there isn't a threshold" for higher risk lending at which the regulator would intervene. Byres suggested it was important to look at further intervention in the context of who is doing the borrowing, and noted a big difference between first home buyers (FHB) and investors.
In light of these comments, Jarden now see macroprudential tightening –tools to tweak lending regulations - as less likely, and suspects higher fixed rates may offset APRA’s need to act.
While Jarden still sees 10-15% upside for house prices ahead, the broker believes a pending increase in fixed rates is likely to take some heat out of the market in second half calendar year 2021.
With final drawing on the Reserve Bank of Australia’s (RBA) $200bn term funding facility (TFF) due on June 30, a cheap source of 3-year fixed rate funding is about to come to an end. Jarden suspects this is likely to see 3-year fixed mortgage rates rise.
The broker notes higher rates and the imminent expiry of the TFF have already seen the last 4 and 5-year fixed rates below 2% disappear. Given the historic relationship between 3-year fixed rates and 3-year swap, the broker expects fixed rates to rise by 25-50bps in coming months.
Jarden believes the current 2.04% spread between 3-year fixed rates (2.14%) and the TFF (0.10%) suggests fixed rates should rise 25bps given the current 3-year swap (0.35%). But the broker also notes the fixed-swap spread which has averaged 2.27% over the last 10 years, implies a 50bps rise in fixed rates to 2.6%.
For longer-term fixed rates (4 and 5-year), Jarden suspects even larger increases are likely. The broker expects the current 4 and 5-year swap rates of 0.63% and 0.87% to likely move higher as yield curve control rolls down.
Based on Jarden’s borrowing capacity model, a 50bps increase in mortgage rates is worth 4-5% to house prices. While this is unlikely to lead to outright falls in prices, Jarden suspects it could see record price growth of recent months moderate.
As a result, the broker concludes the probability of APRA tightening macroprudential policy is reduced.
While higher risk lending is increasing, Jarden reminds investors that much of this is driven by first home buyers, which APRA appears to have little appetite to constrain. As a result, the broker now sees the rebound in investor lending/credit growth as the key risk.
But if APRA were to intervene, Jarden thinks it would be in late-2021/early-2022 at the earliest.
Corporate earnings post-covid rally
With more than 2.01 billion vaccine doses having being administered across 176 countries, covid infection rates have generally flattened or declined where vaccination rates are highest.
The announcement and subsequent progressive global rollout of multiple effective vaccines has sent equities back to pre-pandemic levels and well ahead of pre-pandemic levels in the case of the US market.
Within Wilsons' weekly view on Asset Allocation, the broker notes the rally has been backed by a significant recovery in corporate earnings post the strict lockdowns across much of the world in the second quarter of calendar year 2020.
However, in much of the world, adds Wilsons economic activity is still not operating “normally”. As a result, the broker reminds investors that expectations for both significant incremental economic recovery and significant earnings recovery over the coming 12 months are not without risk.
Cyclical sectors have taken leadership since the vaccine efficacy announcements in early November and have now priced in a significant recovery. At the same time, Wilsons notes the secular growth large cap covid winners of 2020 also remain relatively buoyant.
Since the post November efficacy announcement, the "Value Cyclical" sectors energy and financials have both surged over 50%. With the exception of utilities, all other sectors have grown by 10% or more.
The broker believes there is little margin for error in terms of either economic overheating or undershooting expectations, due to disappointment around the vaccine rollout and the pace of a global reopening.
So far, 12 vaccines producing a total of 8.7 billon doses have received regulatory approval for use in the countries for which they have been ordered. While that’s encouraging, Wilsons also reminds investors that vaccine hesitancy, which is prevalent in low-income and high-income countries alike, poses a potential challenge to herd immunity.
The best vaccines are thought to be more than 95% effective in preventing significant illness. However, it is suggested that vaccinating 70% to 80% of the global population would enable herd immunity and a return to some sort of normalcy.
At the current global pace of 35 million doses a day, Wilsons estimates it would likely take another year to achieve a significant level of global immunity.
Wilsons base case is that vaccines will continue to be effective and that global reopening, led by the developed world will see equities push higher on a 12-month horizon. However, given that vaccine rollout and global reopening scenario is a monumental task, the broker thinks the risk of setbacks along the way still bears watching.
Retail sales stall
Trends within National Australia Banks (NAB) May 2021 Cashless Retail Sales Index suggest Australia’s covid-induced consumer boom has largely run its course. Reflecting the turnaround in dwelling construction, NAB data suggests the drivers of growth are turning away from retail to dwelling, plant and equipment investment and manufacturing.
Signs of consumer spending returning to “normal” pre-pandemic conditions were evident within NAB’s data mapping which points to the Australian Bureau of Statistics' (ABS) retail sales growth measure stalling in May, up just 0.1% on a month-on-month basis.
The ABS printed monthly growth of 1.1% in April, well below NAB’s 2.0% forecast at the time.
NAB’s weekly tracking data suggests this slowing trend accelerated towards the end of the month, and not just in Victoria. While household goods, department stores and other retailing were key drivers of growth last year, NAB’s data mapping shows these sectors recording flat to negative monthly growth in May.
Clothing, footwear and hospitality, which suffered greatly in 2020, had stepped in earlier this year to fill the gap, but NAB’s data mapping points to a weak print in these areas, particularly for clothing and footwear.
BNPL: Multiple account holders at risk
National Australia Bank’s (NAB) latest Consumer Insight Report (June) reveals that nearly one in five Australian consumers were holders of BNPL debt in first quarter FY21, making it the fourth most common form of debt.