In Brief: Recession, Real Estate, Telecoms

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Weekly Broker Wrap: economic downturn, real estate overcorrection, telecom pricing.

-Market conditions not yet pointing to an imminent global economic recession
-Australian real estate responds to first cash rate increase in over a decade
-Pivotal period ahead for mobile market pricing

By Danielle Austin

Economic downturn more likely than recession

Despite the covid-linked global recession occurring only 18 months ago, market commentary has sparked fear that another economic downturn is on the horizon. While global growth is slowing, the Oxford Economics analysts doubt a recession is imminent based on market markers. A brief inversion of the US yield curve, historically a strong predictor of an economic downturn, is the biggest driver of recession concern, and a reason to at least remain vigilant of further predictors according to Oxford Economics.

While the yield curve inversion is the most significant predictor, it is not the only trigger Oxford Economics identified, additionally pointing to anticipated aggressive Federal tightening, China lockdowns and high commodity pricing as having potential to incite a recession. However, it was noted each of these triggers are not enough alone to drive a global economic recession.

Further, market analysts noted successive downward revisions have been made to global growth forecasts since February, driving Oxford Economics’ global gross domestic product growth forecast down -1 percentage point this year, and -0.5 percentage points in the coming year.

Examining these markers, the analysts anticipate an economic slowdown (similar to that of 2015 and 2016) is more likely than a full economic recession. Additionally, on a geographic basis the risk of recession is uneven, with Europe currently the most at-risk region but the US likely to be most at-risk in 2023 given its more progressed position in the economic cycle.

Market overcorrects for cash rate rises

Following the much predicted first increase to the cash rate in twelve years, analysts from Citi note the market may have over-anticipated impacts of the rise given Australian real estate investment trust (A-REIT) stocks have declined -18% year-to-date and -12% month-to-date, and underperformed the market -14% year-to-date and -8% month-to-date. The RBA last week announced a 25 basis point increase to the cash rate, and the market is anticipating near-record cash rate rises will occur over the coming two years. Citi analysts are predicting the cash rate will rise an additional 100 basis points by years end, and a further 100 basis points in the following year to leave the rate near 2.35% by the end of 2023.

Taking a look at historical cash rate rises, the Citi analysts noted underperformance in anticipation of rate rises usually reverses within 60 days of the first rate hike, with the market generally pricing in potential impacts before increases are issued. Should the current rate cycle reflect this, Citi sees possible near-term upside for stocks including Goodman Group ((GMG)), Charter Hall Group ((CHC)), Stockland ((SGP)) and Abacus Property Group ((ABP)).

Citi highlights given a lack of evidence suggesting weakness in direct property markets to date, and with market participation indicating ongoing demand for real estate, the market may have overcorrected ahead of the initial rate rise.

Pricing decision looms over domestic telecoms

A pivotal period could be ahead for the Australian mobile market, with the potential Telstra ((TLS)) and TPG Telecom ((TPG)) network deal, and particularly TPG Network’s pricing response, key to the market outlook in Goldman Sachs’ opinion.

While the broker is anticipating Telstra will increase its pricing $3-6 per month in July, bringing pricing back in line with historical premiums and introducing an inflation-linked mechanism for future pricing, it expects TPG will wait for the proposed network to receive regulatory approval before reviewing its pricing.

With approval for the network expected before the end of the current year, the broker notes TPG will be face the decision of raising prices in early 2023 given a then vastly expanded network, or hold prices steady to encourage subscriber growth.

Retaining lower prices despite facing cost pressures of an expanded network will likely place pressure on market rationality. With competitor Optus expected to follow Telstra in raising prices this year, both companies could lower prices to remain competitive if TPG does not issue a price increase next year.

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