In Brief: Investor Confidence, House Prices, Oil Prices, Discretionary Retailers, Healthcare

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Weekly broker wrap: investor confidence depleted, house price decline accelerates, oil price fall ahead, opportunity in discretionary retailers, healthcare slow to rebound.

-Market volatility and an uncertain outlook shakes investor confidence
-House price decline accelerates among interest rate hikes
-Oil price and demand likely to decline amid an economic downturn
-Market ponders opportunity in under-pressure discretionary retailers
-Healthcare sector fails to rebound despite easing of covid restrictions

By Danielle Austin

Investor confidence dives amid macroeconomic pressures

Retail investor confidence is lower today than it was at the peak of the pandemic, according to the latest survey conducted by Chartered Accountants Australia and New Zealand (CAANZ).

The survey suggested ongoing market volatility amid geopolitical unrest and an inflationary environment have all shaken investor sentiment, with the CAANZ representatives claiming the results highlight a clear desire from investors for simplified and consistent reporting from companies.

Collected data revealed only 39% of retail investors have high confidence in the domestic market, and only 24% have high confidence in international markets, both representing a -10% decline on last year, while investors who considered global political unrest to be the biggest risk to the domestic stock market increased 10% on last year.

Declining house prices gain momentum

While continued house price declines in the month of June have come as no surprise, analysts from Morgan Stanley have been surprised by the speed with which pricing appears to be moving, with the pace of house price declines exceeding the start of any downward price cycle in the last three decades.

The broker calculates house prices are now declining at a -10% annualised pace, and -17% and -13% in Sydney and Melbourne respectively. The -0.8% drop in June marks the second consecutive monthly decline, and a steep acceleration from the -0.3% drop reported in May, with the broker warning the rate hike cycle will likely only exacerbate the situation.

Investors should note current house prices remain 8.7% higher than one year ago, but Morgan Stanley warns the faster than expected decline poses downside risk to its previous -15% house price decline forecast.

Oil price scenarios depend on depth of economic downturn

Commodities analysts are warning that a global economic recession could trigger a decline in oil prices to US$65/bbl within the year. Citi’s commodities team have highlighted that while historical read-throughs suggest global oil demand and prices will be dragged down by an economic downturn, it is difficult to predict how far the fall could be without knowing the severity of an approaching recession.

Although the US Federal Reserve is attempting to generate a modest economic slowdown, rather than a recessionary event, the broker estimates a recession scenario could see Brent crude oil decline to US$65/bbl by the end of the year, and potentially to US$45/bbl by the end of 2023.

Investors should note that the broker does not currently expect the US will fall into a full scale recession and anticipates that in its recessionary scenario producers would reduce volumes.

Discretionary spending continues to bear the brunt of consumer sentiment

Risk continues to surround discretionary retailers as spending slows, sentiment remains low, and the market continues to price in future rate hikes.

For investors, Jarden analysts highlight the question of whether the risk/reward balance is now a better payoff, and notes while risk does appear more balanced a potential soft-landing for Australia’s economic downturn and an increase to sentiment could provide some buffer and see valuations re-rate.

In the supermarket sector, the broker cuts Coles Group ((COL)) to a Neutral rating following recent outperformance by Woolworths Group ((WOW)) and Metcash ((MTS)), and continues to consider Domino’s Pizza ((DMP)), Treasury Estate Wines ((TWE)) and Costa Group ((CGC)) likely beneficiaries of an impending economic downturn.

For discretionary retailers, it lifts its rating on Harvey Norman Holdings ((HVN)) to Neutral, but maintains the sales outlook for the sector appears challenging.

Domestic healthcare recovery lags peers

Australia’s healthcare system has bucked global trends, with volumes failing to rebound with the easing of restrictions over the last six months. Analysts from Credit Suisse note pent-up demand has seen volumes in international markets return to, or above, pre-covid levels, while in Australian general practitioner visits remain -7% below.

The broker attributed the slower recovery in Australia to an uptake in telehealth appointments, currently accounting for 20% of all GP visits, as well as deep staffing constraints impacting the sector. Data from the Australian Bureau of Statistics revealed 69,000 job vacancies in the healthcare sector in May, a 131% increase compared to pre-covid.

Longer-term, the Credit Suisse analysts expect these trends to reverse, but expects lower volumes to weigh on margins in the short-term. The slower recovery sees the broker downgrade its FY23 earnings per share estimates across its healthcare coverage, with Sonic Healthcare ((SHL)) declining -2%, Healius ((HLS)) declining -12% and Australian Clinical Labs ((ACL)) declining -3%. Sonic Healthcare remains Credit Suisse’s sector pick.

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