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In Brief: Shares Can Outrun Inflation, E-Commerce, China, Mortgages & REITs

Weekly Reports | Nov 26 2021

This story features CHARTER HALL RETAIL REIT, and other companies. For more info SHARE ANALYSIS: CQR

Weekly Broker Wrap, In Brief: Shares can outrun inflation; e-commerce; China; mortgage stress and REITs.

– Shares can outrun inflation 
– Aussies record spending via social media 
– Asset price deflation for China?
– Record lows for mortgage holder stress
– Morgan Stanley on smaller-mall REITs

By Mark Woodruff

Shares can outrun inflation

Equities have the potential to perform well compared to bonds and cash in an inflationary environment, according to Ord Minnett. Both the Value style of investing and cyclical shares are generally favoured, while defensive sectors tend to lag. 

Cyclical-oriented sectors include Consumer Discretionary, Materials, Energy and Financials, while examples of defensive sectors are Communication Services, Consumer Staples, Healthcare, Real Estate and Utilities.

Inflation is usually accompanied by the benefits of stronger economic conditions, and in addition, companies can often pass through higher prices to consumers. Moreover, costs can be managed down (for example via hedging or cost cutting) in order to boost earnings, explains the broker. This helps offset a decline in the market price/earnings (PE) multiple brought on by higher interest rates.

Ord Minnett feels some of the recent inflation spikes are pandemic-induced (e.g. labour shortages, supply bottlenecks and travel restrictions) and thus transitory, though could still take a year to retrace. However, it’s thought the recent cocktail of fiscal and monetary stimulus, along with pent-up demand, should combine to see inflation settle at a higher level than previously.

Interestingly, the broker says information technology has been a strong performer through past inflationary periods. However, this linkage may be somewhat weakened when taking into account the structural growth in the sector, which may have leapfrogged most hurdles.

Aussies record spending via social media

The average Aussie now spends $35/month via social media channels, a 40% year-on-year increase from 2020, according to PayPal's eCommerce Index.

The most popular platforms are Facebook (70%) and Instagram (42%), though Generation Z (9-24 years olds) shoppers have a preference for Instagram (62%). While they still shop on Facebook (61%), they are increasingly buying more through a broader range of social platforms including Snapchat, TikTok and Twitch.

One in five Australians are following their favourite brands on social media to keep on top of sales and discounts. Having spotted a bargain, two in five then prefer to go to the website to make a purchase. 

Gen Z shoppers lead in both following brands and purchasing them online, and also have a higher rate of discovering new brands online than other age groups.

Peter Cowan, Managing Director of PayPal Australia notes “The incredible amount of time we all spend on social media, especially younger people, is positioning social commerce as one of the biggest trends we will see in online shopping over the next few years”.

Meanwhile Gen Zs, followed closely by Gen Ys, are contributing to a rapid uptick in consumer subscriptions. Little wonder then that one in six Australian businesses offer a subscription service, with nearly half of those launching a new subscription offering during the pandemic. 

While movie and TV subscriptions were the top category across all age groups, it wouldn’t be a pandemic without mentioning 5% of Australians have subscriptions for the likes of toilet paper and mindfulness apps, as well as pet supplies and accessories.

Businesses with subscriptions say they saw revenues increase on average by a third after implementing a subscription model, points out Mr Cowan. However, the jury is still out on this trend with an equal number of subscription businesses expecting current levels to be maintained as those bracing for a reversion to pre-covid levels.

Asset price deflation for China? 

Fresh from securing at least another five years of leadership, Chinese President Xi Jinping has little incentive to prove himself through GDP figures, according to ANZ Bank strategists.

Indeed, high quality development will be preferred, even if that is at the expense of growth. ANZ forecasts GDP growth of 4.6% for FY22, down from an estimated 8% for 2021.

More worryingly, ANZ believes asset price deflation is a major macroeconomic risk and points out headline inflation numbers (CPI and PPI) don’t capture the outlook for property prices, which could potentially fall by -5%.

ANZ notes core CPI weakness has been persistent, reflecting the sluggish outlook for household incomes. Youth unemployment is still high compared with previous years, while household income per capita is growing at a slower rate than pre-pandemic levels. It’s thought the prospects for income growth will hinder consumption and property investment, potentially risking long-term economic health.

As China’s economy slows, ANZ suggests investors should focus on property prices, as expectations of positive growth remain crucial for financial stability. Following the slide in property prices in top-tier cities this year, the markets will be watching whether Chinese authorities are willing to relax property measures in 2022.

Record lows for mortgage holder stress

According to new research from Roy Morgan, mortgage stress today is less than half the level experienced during the GFC in 2008. Polling shows an estimated 584,000 or 15.8% of mortgage holders were ‘At Risk’ of mortgage stress in the three months to September 2021.

‘At Risk’ is defined as mortgage repayments exceeding a certain percentage of household income, depending on income and spending.

The current record-low level has been attained via a combination of record-low interest rates and record levels of government support, notes Michele Levine, Chief Executive of Roy Morgan. In addition, lenders have implemented measures to support mortgage holders during the pandemic.

Moreover, strong employment growth during 2021 has led to a record 13 million Australians being employed compared to less than 12 million at the beginning of the pandemic.

A similar downward trend has also emerged for those mortgage holders considered ‘Extremely At Risk’, which is when the interest only component exceeds a certain proportion of household income.

Smaller mall REITs

Following increased mobility as pandemic restrictions ease, Morgan Stanley feels the relative attractiveness of smaller mall REITs with regional exposure may lessen.

As a result, the broker lowers the rating for Charter Hall Retail REIT ((CQR)) to Underweight from Equal-weight, and its rating for Shopping Centres Australasia Property Group ((SCP)) to Equal-weight from Overweight. 

Over half of their respective retail malls are located outside of capital cities and supermarket tenants are the largest contributors to rent.

While both should suffer from slowing regional migration, with less of a snapback trade on reopening compared to some other REITs and limited balance sheet capacity the analysts have a preference for Shopping Centres Australasia. This is because of a higher forecast three-year compound annual growth, explains Morgan Stanley.

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