The Wrap: Top 10 Global Growth Risks, Packaging, Private Debt & BNPL

This story features AMCOR PLC, and other companies. For more info SHARE ANALYSIS: AMC

By Mark Woodruff

Top 10 risk scenarios impacting upon global growth and inflation 

The post-pandemic recovery is expected to continue, with global GDP expanding by 4.1% in 2022, down from the 5.4% rate estimated for 2021.

However, The Economist is tracking ten scenarios that would see growth fall short of its forecasts.

Given recent media airtime, at least five of the risks will surprise no one. They are: a decoupling of the global economy due to increased fallout in US-China relations; conflict between China and Taiwan, forcing the US to intervene; faster-than-expected monetary tightening leading to a US stockmarket crash; a property crash in China leading to a sharp economic slowdown; and the emergence of new covid variants.

There may also be currency and/or debt crises in Emerging Markets stemming from either the above-mentioned monetary tightening or a rise in commodity prices. This commodity risk is partially linked to a separate risk pertaining to climate-change-induced droughts and/or famine.

Social unrest was already a pre-pandemic feature for the Middle East, Africa and Latin America, and some countries within these regions underwent tough lockdowns and deep recessions. It’s thought increasing unrest could lead to a government collapse, panicked investors and destabilising capital outflows. Mind you, The Economist also believes this same risk holds true for traditionally stable Western states and long-standing authoritarian regimes. 

Under another scenario, worsening relations between the EU and China could result in operational disruption for affected Chinese companies and leave EU companies operating in China vulnerable to retaliation.

When probability and impact are weighed for the ten risks, investors should be least worried about an inter-state cyberwar crippling state infrastructure in major economies. The equal top-ranked risks were the above-mentioned potential for worsening US-China relations, a Chinese property crash and the monetary-policy-induced US stock market crash.

Is the de-rated packaging sector an opportunity?

The recent market de-rating of the Australian Packaging sector has overshot fundamentals and underestimates the rate of organic earnings growth the industry can deliver in the wake of covid-19, believes Jarden.

The industry stands to gain, especially if increased ‘At-Home’ consumption patterns developed during lockdowns can stick over the mid-term. The pandemic was a hiatus for the decade-long structural shift to 'Out-of-Home' (cafes and restaurants) food & beverage consumption from 'At-Home' (grocery and specialty stores).

This of particular relevance for both Amcor ((AMC)) and Pact Group ((PGT)), which derive 68% and 48% of revenue from food & beverage, and the analysts believe consensus forecasts are yet to reflect any potential for higher revenue growth rates.

The broker initiates coverage of the sector with an Overweight stance and favours Amcor ahead of Orora ((ORA)) and Pact, and believes there’s adequate risk/reward upside for investors at this early stage of the post-covid recovery. Amcor and Orora may benefit the most from expansions in return on invested capital (ROIC) based on current consensus estimates, note the analysts.

Additional upside may spring from the latent potential from prior M&A’s and divestments, which are yet to fully deliver earnings upside. 

Moreover, it should be remembered that contract structures allow the majority of any input cost increases to be passed on to customers. This, along with low though stable earnings growth, prompts Jarden to suggest Australian packaging companies should be allocated to the defensive part of an investor’s investment portfolio.

The swing toward private debt markets

In the ongoing search for yield, it seems investors have turned toward private debt markets, which are expected to double by 2025. Returns can be up to three or four times what retail investors might get on conservative fixed income positions.

Non-bank lending has been at the forefront, which has recently inspired US fund management giant Apollo Global Management to take a 50% stake in a local non-bank lender Max Cap.

While this is a global trend, Australia’s private capital market offers one of the most attractive risk/return profiles. Assets under management rose steadily in 2020 to a record $77bn, points out Preqin, a company that provides financial data to alternative asset professionals.

The commercial lending market in particular values speed of execution and flexibility, as well as the capacity to deliver on terms outside where banks are able to trade, according to commercial broker, Stamford Capital.

SMSFs and super funds are turning more and more to private debt markets and a lot of private real estate deals are being funded this way, according to Matt McKenna at KPMG’s Debt advisory Services.

Should merchants add a surcharge to BNPL sales?

Is a merchant willing to risk the loss of potential sales by adding a surcharge to BNPL sales?

Citi searches for an answer in the wake of the final report from the Reserve Bank of Australia on Payments Regulation, which now calls for the removal of no-surcharge clauses.

According to the broker, the amount of lost sales will likely be determined by the proportion of retailers deciding to add a surcharge. If adding a surcharge becomes the norm, then this reduces the potential impact to a retailer.

Moreover, the level of competitive intensity and consumer engagement are more likely to determine long-term BNPL merchant take-rates. Also, surcharging in an online context is quite rare (Amazon aside), which in the analyst’s view reflects the risk of lost sales/cart abandonment. Citi analysis indicates that if over 7.5% of a retailer’s BNPL’s sales were to disappear due to surcharging, then that retailer is unlikely to add a surcharge.

It’s felt Zip Co ((Z1P)) is less exposed given its average merchant fee of 2.5% to 3.0% in Australia is more in-line with the PayPal offering. The broker is currently research restricted on Afterpay ((APT)) due to Citi’s role as a financial advisor on the Square transaction.

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