The Wrap: BNPL, Banks, Steel & Are Energy Costs Impacting GDP?

Weekly Reports | Nov 05 2021

Weekly Broker Wrap: BNPL rankings; banks; steel; and are energy costs weighing on world growth?

-The latest data and rankings for BNPL providers 
-The effect of rising energy costs upon world growth 
-Australian steel stocks
-Why Macquarie is Neutral on the bank sector


By Mark Woodruff

The effect of rising energy costs upon world growth 

The Economist utilises its comprehensive forecasting models to weigh the impact sustained higher levels for oil, gas and coal prices will have on world growth.

An assumption within the model assumes oil, gas and coal prices remain at their expected fourth quarter 2021 levels indefinitely.

The effect upon global GDP is more benign than some commonly-held views due to two main factors. For oil, the most globally important of the three commodities, the real oil price (adjusted for inflation) is not close to the levels experienced over 2008 and 2011-2014. 

In short, The Economist points out oil prices would have to run much higher for a global recession to be a possibility. The same scenario applies for gas and coal.

Secondly, because of declining relative usage, there is now less oil, gas and coal required to generate each unit of output in the world economy. Moreover, as economies across the world transition to become greener, stagflation risks from energy prices will diminish.

A moderate global GDP impact from higher energy prices doesn't preclude large GDP impacts upon some economies or much greater impacts for financial markets.

The Economist estimates equities and bonds would take a sizeable hit, as growth slows and central banks act to tame inflation. 

Global equities would be broadly flat over 2022 and lose -6% in 2023, before returning towards The Economist’s baseline equity-returns path. Global government bonds would also peak at 1.3 percentage points above the baseline in 2024 before slowly declining as growth and inflation normalise.

Why Macquarie is Neutral on the bank sector

Should bond yields retain current levels, Macquarie believes it’s only a matter of time before borrowers face higher than the current 2% for two-year fixed loans.

Even with the banks absorbing some increased funding costs in the name of competition, consumers will likely become more cautious about borrowing at their maximum capacity if a rate rise is expected. The end result could be a slowdown of credit growth in FY22, suggests the broker.

While an economic slowdown would be negative for banks, the direct impact from higher rates is positive, and Macquarie estimates that in relative terms margin tailwinds in FY22-24 would favour ANZ Bank ((ANZ)) and Westpac ((WBC)) more so than Commonwealth Bank ((CBA)) and National Australia Bank ((NAB)). 

Macquarie feels the structural appeal of the banking sector is limited by intense competition, despite funding tailwinds and cost-out opportunities. 

The broker has an overall Neutral sector view though has Outperform ratings for ANZ, NAB and the regional banks.

Australian steel stocks

Jarden maintains a positive view on Australian steel stocks, with a preference for Sims ((SGM)) over BlueScope Steel ((BSL)).

Following an investor call with Nucor Steel in the US and feedback from other US-industry peers, the broker thinks the US steel price could hold up longer than consensus expects.

The current power restrictions in China are suppressing steel production and thus exports, and Jarden expects this trend to continue. Moreover, there’s potential upside from the US infrastructure investment plan, pending government funding approval. 

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