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The Wrap: Robo Advice, China, Lockdowns, and Listed Property

Weekly Reports | Jul 30 2021

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Weekly Broker Wrap: The rise of Robo advice, China’s growth U-turn, lockdown hits GDP, listed property feels lockdown impact

-Robo advice could potentially be a $60bn market in Australia
-China’s retreat from technology to trigger a shift back to manufacturing/consumption
-Landlords with retail exposure have greatest exposure to lockdowns

By Mark Story

Robo advice on the march

Rainmaker Information believes the rapid fall in investment adviser numbers, courtesy of the recent industry shakeout, has led to a corresponding rise in digitally delivered robo advice, which the researcher suggests has the potential to be a multi-billion-dollar market in Australia.

Rainmaker maintains that the way robo advice is delivered – as a low-cost, automated replacement to a ‘real’ human adviser – lends itself to becoming increasingly more important for millions of Australian consumers.

In short, robo advisers are online financial planning and investment services offering simple pre-packaged investment recommendations to retail investors. Robo advice is based on answers to basic questions robo advisers ask online to get a snapshot of an investor’s current financial position, income, age, debt levels, and financial aspirations.

After determining an investor’s risk profile, analysis by computer-generated algorithms comes up with suggested investment products, including low-cost exchange-traded funds (ETFs).

While only two of the eight robo advice providers identified in Australia by Rainmaker report on their funds under advice (FUA) – Stockspot and InvestSmart – the researcher suspects this market may be collectively advising on several billion dollars.

Having adjusted figures for the US market – in which there is currently $825bn in funds under robo advice – for the Australian population, Rainmaker sees a $60bn potential, twice the amount originally estimated in 2018.

With the number of human advisers having dropped from 28,000 two-and-a-half years ago to 19,000, Alex Dunnin, executive director of research at Rainmaker, expects digitally delivered robo advice to become more relevant than ever.

“It is a very cost-effective way for retail investors to obtain limited financial advice and be connected with packaged investment solutions,” said Dunnin.

At around 0.4% to 0.5% annually, total fees charged by robo advice are around half the total fees charged by the average super fund in Australia.

Based on Rainmaker data, Australian robo advisers offer on average seven investment solutions, 70% of which are diversified, meaning they mix their investments across exposure to shares, property, or bonds.

China’s downshift to lower growth

To reflect a myriad of factors including concerns about monopoly power and data security, China appears to have changed tack on its technology sector, and ANZ Research suggests the implications are substantial.

Within its July issue of Blue Lens, ANZ suggests the vigour of China’s shift in policy targeting the tech sector – arguably one of the country’s hot spots of growth for the past five years – is worth keeping on radar.

ANZ argues that if technology – which accounted for 1% GDP growth in 2018 –is unable to sustain China’s high rate of growth, the focus will shift back to manufacturing and consumption.

One of the big conundrums confronting China is maintaining manufacturing’s share in GDP on the one hand, while honouring climate commitments on the other.

A BIS study that mapped data from 121 countries between 1971 and 2016 found that carbon emissions rise with economic development, manufacturing activity, and urbanisation: All three of which have been integral to China’s economic fortunes over recent decades.

ANZ suspects China’s recently developed five-year plan to reduce energy intensity by -13.5% by 2025 will put a major drag on the growth of its industrial sector. As a case in point, while countries have decoupled carbon emissions from GDP growth, almost all were growing slowly.

While China’s household sector has been regarded as the source of future growth for some time, ANZ believes structural constraints mean further declines in the savings rate are likely to be modest.

For example, the decline in China’s savings rate from 52% of GDP in 2008 to 44% – which corresponded with the halving of China’s growth rate – reveals that even a falling srate will not insulate China from its structural headwinds.

One of these headwinds is the shrinking of China’s working-age population, with some studies suggesting the population will peak by 2025. While one solution could be to raise China’s relatively early retirement age, it’s argued that the impact on the country’s unique demographic and social structures would make this option unrealistic.

In light of these structural constraints, the Ministry of Commerce’s recently published Five-Year Plan for Commerce Development projected retail sales only growing at 5% annually for the next five years, down from 10% in the last five-year plan.

Sectoral restrictions aside, China also faces macro policy constraints, with the IMF putting China’s augmented public debt at 96% of GDP. Not unlike many economies, the IMF concludes that China’s fiscal capacity is limited.

BIS data also highlights an increase in China’s non-financial debt from 263% of GDP at the end of 2019 to 290% of GDP by the first quarter of 2021.

While structural concerns about the build-up of debt is a driver of China’s recent shift towards a more prudent monetary policy stance, ANZ notes China’s recovery hasn’t been as vigorous as hoped. The end result, concludes ANZ, has been a step towards renewed easing through a reduction in bank reserve requirement ratios.

Admittedly, China will continue to grow more quickly than many other countries.

However, what’s important to note, adds ANZ, is that risk-driven constraints on the tech sector, demographic constraints on consumption, climate constraints on manufacturing, and macro constraints on monetary and fiscal policy suggest the economy is gearing down for slower growth.

Lockdown: Major shift in near-term economic outlook

With Sydney now a month into a hard lockdown, BIS Oxford Economics’ initial forecast is for consumption in NSW to fall by around -8% in the third quarter due to restrictions on travel, and a lack of access to services.

The forecaster does not expect to see a return to relaxed trading and travel conditions until 70-80% of the adult population is fully vaccinated, which at the current pace, it will take until the end of the year.

With the share of cases that have been active in the community remaining stubbornly high, Oxford expects the NSW government to continue to pursue an eradication target. The net effect is that restrictions will not be meaningfully relaxed until after community transmission falls to zero.

Accordingly, the forecaster’s revised expectation is for Greater Sydney to face strict lockdown conditions throughout the third quarter.

Assuming that is the case, Morgan Stanley sees GDP contracting -1.2%. While the greatest impact on GDP growth will come through household consumption, some spending components are expected to increase, including furnishing/household equipment and utilities.

However, the broker expects greater online spending to be proportionally smaller this time around with overall household spending falling -2.5% over the quarter.

While GDP contraction of -1.2% is a meaningful near-term change to Morgan Stanley’s outlook, the broker believes the medium-term outlook for 2022 remains relatively intact and expects a robust recovery from this disruption.

Overall, having factored in the government’s policy response to vaccine rollouts, the consumer outlook, and a likely delay in the Reserve Bank’s QE taper – from September to November – the broker sees a relatively quick recovery over fourth quarter FY21 and first quarter FY22, with minimal scarring impact.

Morgan Stanley’s full-year 2021 GDP forecast drops from 5.0% to 4.1%, while the broker’s 2022 forecast increases from 3.2% to 3.5%, with most of this adjustment coming through consumer spending.

The broker expects lockdowns to have a large impact on the labour market and expects a decline in hours worked for NSW and Victoria, resulting in a consequent increase in underemployment.

Assuming lockdowns continue as expected, the broker thinks business assistance measures are however not at the scale seen last year.

While Sydney’s lockdown will almost certainly see a significant fall in national third-quarter GDP, Jarden remains equally optimistic the economy will bounce back and will rebound to prior levels by early 2022.

While earlier channel checks suggest business finances remained in good health, thanks to the significant stimulus over 2020, Jarden is hopeful that the current outbreak helps accelerate the vaccine rollout, thereby reducing the need for future lockdowns.

The broker expects total employment to fall by -200,000 in the third quarter but expects unemployment to fall back to 5% by end-21, with most of the impact experienced through hours worked which will likely fall -10% in NSW.

But unlike 2020, the broker expects the fall in hours worked to feed through to a more noticeable dip in household income.

While Jarden expects total household disposable income to fall -0.8% quarter-on-quarter, the broker expects a corresponding fall in consumption to result in a savings rate rebound to 11%, giving consumers plenty of firepower for the recovery.

Listed property: Lockdown implications

With lockdown measures extended until at least 28-August, Macquarie is cautious on retail for short-term cashflow impacts and expects delays in office leasing.

While developers are likely to see minimal impact, the broker notes the key risk is elongated lockdowns which reduce near-term residential sales rates and potentially delaying project starts.

Overall, Macquarie believes landlords with retail exposure are the most exposed to potential lockdowns, and notes REITs with retail, and to a lesser extent office, saw the lowest levels of cash collection across the sector.

While Lend Lease Group’s ((LLC)) – only REIT with a construction arm – Australian commercial development pipeline may be subject to the restrictions, Macquarie views the downside as limited in the absence of the reintroduction of a construction halt.

The broker believes risks are increasing to the introduction of the code of conduct in NSW, following the recent reinstatement of the code in Victoria SMEs with annual turnover under $50m, and/or a shift to provide some level of waivers.

Assuming similar relief as seen in calendar year 2020, Macquarie believes the most at-risk sub-sector is retail, while other assets classes should hold.

Based on the experience from calendar year 2020, which included the leasing code of conduct, Macquarie concludes every week of national lockdowns presents -3.7% of earnings downside for Scentre Group ((SCG)), -3.0% for Vicinity Centres ((VCX)) and -1.5% for SCA Property Group ((SCP)).

However, Macquarie is currently forecasting rent relief for several major groups with retail exposure, while many of the REITs are forecast to receive no rent relief in FY22. The broker expects rent relief to have a 7.6% impact to Vicinity Centres FY22 earnings, 5.9% to Scentre Group’s FY21 earnings, and 4.3% to GPT Group’s ((GPT)) FY21 earnings.

Meantime, while previous periods of extended lockdown measures have shown office has been relatively resilient compared to retail, Macquarie identifies Dexus ((DXS)) as the key risk in office, with around 84% exposure.

Having assessed developers’ exposure to the suspension of all construction for a two-week period to 31-July, the broker believes Mirvac Group ((MGR)) has the greatest total pipeline exposure in NSW at 26%, although the exposure is limited to 9% of settlements impacting FY22.

By comparison, Scentre Group is the most exposed with 20% of its residential pipeline settling in FY22. Based on the settlements expected for FY22, the broker has assessed the impact of a one-month delay in NSW and estimates this will result in a -1% impact on Stockland's ((SGP)) FY22 funds from operations.

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