In Brief: Debt Doubles, Investment Markets, Homewares Retail

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Weekly Broker Wrap, In Brief: Debt to double amid rising interest rates, flows downgraded for small cap investment platforms, homeware retailers to suffer amid tightening of discretionary spend.

-Doubling of national debt in three years to weigh on taxpayers
-Small cap investors should expect continued volatility in the market
-Homewares discretionary spend like to be subdued ahead

By Danielle Austin

Taxpayers burdened with paying the piper as debt per person doubles

The cost of the covid pandemic will impact taxpayers for years to come, with significant borrowing in the pursuance of a zero-covid policy set to have long-term impacts in Australia. With the country’s debt burden increasing 11.2% in 2021 to total $1.462 trillion while global debt servicing costs fell to a record low at 1.6%, the looming threat of rising interest rates is set to significantly increase national debt.

Economists at Janus Henderson predict Australian debt per person will double by 2025 to $68,806 thanks to the compounding impact of rising interest rates. Australian borrowing in response to the pandemic outpaced the global average, with global debt increasing 7.8% in 2021 compared to Australia’s 11.2%. While Australia benefitted from a low debt to gross domestic product ratio when borrowing, with a -47% discount to international peers allowing it to remain one of the least indebted major industrialised nations despite the huge borrowing surge, rising interest costs look to drive the increase of Australian debt at a steeper rate than both the United Kingdom and Europe in 2022.

Janus Henderson anticipates global government debt to increase 9.5% in 2022, with the United States, Japan and China identified as major drivers, while global debt servicing costs will increase by an approximate 14.5% on the back of rising interest.

Market volatility makes for a difficult read-through on investment platforms

Market rebounds since the first half result season have driven Citi to upgrade its outlook on small cap investment platforms, but the broker notes high probability of volatility ahead. While the ASX-300 improved 3% since companies reported first half results, the broker expects the geopolitical conflict between Russia and Ukraine, increasing interest rates and the threat of further covid outbreaks to continue to cause market uncertainty, and anticipates lower net flows as a result.

Taking into consideration impacts of the better than expected market result in recent months for investment platforms Netwealth Group ((NWL)) and Hub24 ((HUB)), Citi has upgraded its funds under administration forecasts for each company by 1%. On predicted market volatility, the broker downgrades its flow forecast for Netwealth to $14.3bn from $14.8bn but remains above company guidance of more than $13.5bn. Citi analysts also noted medium-term earnings should benefit from a shift towards specialist investment platforms.

Similarly, Citi downgrades its flow forecast for Hub24 to $13.0bn from $13.7bn, noting the platform increased advisors 49% year-on-year in the second quarter which looks to be a positive indicator for future growth. The broker expects Hub24 to also benefit from an emerging specialist platform trend and predicts a 23% earnings per share compound annual growth rate over the coming three years.

Retailers continue to build stock as inflation looks to impact on discretionary spend

Concerns that the recovery of the travel industry would see consumers redirect discretionary spend away from furniture and homeware purchases have not yet been realised. Following a fairly flat start to the year for retailers, consumer insights have suggested sales uplift in March pointing to continuing resilience in the industry for the time being.

Furniture and homeware retailers have suggested they will continue to build stock to retain elevated inventory levels given supply chain constraints are expected to continue into the coming financial year. Meanwhile, higher freight costs and the additional costs related to holding higher inventory levels look likely to impact on margins for retailers.

Inflation will likely also come into play for the industry moving ahead, with expected 4.5% year-on-year inflation likely to impact on furniture and homeware retailers given rising inflation historically inversely correlates with discretionary household good spending.

Considering both Adairs ((ADH)) and Temple & Webster ((TPW)), Jarden analysts noted that Adairs’ sticky loyalty members base contributes around 80% of customer sales, while it’s dual physical and online presence hedges risk of changing consumer trends. Temple & Webster, meanwhile, offers less exposure to supply chain constraints given its third-party, direct delivered products make up 74% of total sales and the company has solid visibility on supplier stock levels. Further, the company’s emerging commercial trade and DIY categories, now accounting for 11% of sales, offer a buffer in the event of furniture and homeware sales declines.

Moving forward, Jarden sees opportunity for retailers to distinguish themselves through innovation in the digital space. The broker expects retailers who commit to investing in digital experience, capability and customer acquisition could improve their competitive position in the post-covid world.

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