The Wrap: Stagflation? Asian Savings Slump, Insurers & Healthcare

Weekly Reports | Oct 22 2021

Weekly Broker Wrap: A savings slump in parts of Asia; insurance; healthcare; and is stagflation coming?

-What is the risk of 1970’s style stagflation?
-A savings slump in parts of Asia may prevent a return to neutral monetary policy
-Will rising bond yields lift all insurers?
-Winners from increased covid testing

By Mark Woodruff

A savings slump in parts of Asia

It may take a few years of rebuilding household savings in parts of Asia before consumption can return to pre-pandemic levels. At present, a strong re-opening rebound in private consumption cannot be relied upon.

A lasting dent has been inflicted upon the financial position and incomes of households particularly in Indonesia, the Philippines and Thailand, explains ANZ Bank.

An unexpectedly prolonged pandemic, alongside diminished income growth, has forced householders to drawdown on savings. As an example, household savings as a share of incomes have dropped to the lowest on record in Indonesia.

Unfortunately, the situation is unlikely to be rectified quickly by a rise in incomes, as various economic indicators in all three countries point to slack in the labour markets.

As a result, governments are expected to have larger budget deficits for longer. Monetary policy normalisation will also be slow and independent of the US Federal Reserve. 

More importantly, it is conceivable that the terminal (natural or neutral) policy rate may well settle at lower than pre-pandemic levels, suggests ANZ Bank.

Will rising interest rates lift all insurers?

Government bond yields have risen sharply since the beginning of the December 2021 quarter.

This is mirroring trends in the US and particularly in the UK, where government bond yields are at their highest levels in two and a half years.

Credit Suisse believes there are strong indications these bond yields are likely to continue to rise, and sets about investigating potential earnings upsides from the large fixed income portfolios that insurers hold.

The broker concludes QBE Insurance ((QBE)) has around 2% earnings upside for every ten basis points rise in bond yields, and double the sensitivity compared to both Insurance Australia Group ((IAG)) and Suncorp Group ((SUN)).

The order of Credit Suisse’s investment preference in the sector remains QBE, followed by Suncorp and IAG.

Winners from increased covid testing

In August, domestic polymerase chain reaction (PCR) covid testing in Australia increased to more than four times the monthly average in the second half of FY21.

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