In Brief: China Property, Growth Investing, Asset Managers & Private Health Insurers

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In brief: China’s mortgage payment boycotts; growth style investing; earnings forecasts slashed for asset managers & private health insurers.

-Boycotts on Chinese mortgage payments
-Is the Growth style of investing re-emerging?
-Morgan Stanley slashes forecasts for asset managers
-Lower claims growth for private health insurers

By Mark Woodruff

Chinese mortgage payment boycotts 

Unlike the situation in Australia, most homeowners in China start making mortgage payments before taking possession of their homes, and generally before building has even commenced.

Due to a lack of confidence in distressed developers, homeowners across China have begun mortgage payment boycotts, which according to Oxford Economics is a very serious threat to the financial position of the sector.

Because these boycotts don’t reflect an inability to pay, Oxford Economics believes the immediate potential damage to the banking sector looks manageable, as the size of mortgages involved so far is limited. Also, most homebuyers will likely opt to continue to repay their mortgages to avoid damaging their social credit scores.

In the name of social stability, not just financial, Oxford Economics expects authorities will take more forceful actions should the boycott worsen rapidly, as some 70% of householder wealth is tied up in property. So far, banking and housing authorities, together with local governments, have stepped in to contain the fallout.

Recent media reports suggest the probable establishment of a real estate fund. Citi sees this as the first crucial government-led step to save the stressed property sector, though the initiative alone is considered insufficient to fundamentally resolve the property developer default risk. 

The broker expects the mortgage payment boycott will have far-reaching unintended impacts, including increased difficulties for developers to refinance and destock.

While the strategists at Oxford Economics are ruling out a crisis at this stage, reduced confidence in developers would likely exacerbate the real estate downturn and add to financial stability and growth concerns over the longer term.

Housing sales, a major source of developer funding, look set to remain weak, according to Oxford Economics. Although monetary easing and debt reprieves have helped to contain financial risks, these measures are not considered a long-term solution to the problem. In short, defaults by high-profile property developers are thought to remain the biggest risk to China's real estate and financial sectors.

Deeper real estate weakness could potentially undermine fiscal health and affect local governments' ability to roll out much needed policy stimulus to boost growth in the second half of 2022, according to Oxford Economics. A lack of land demand by property developers is expected to weigh on land sales by local governments, which accounts for around about 40% of their revenue.

Is the Growth style of investing re-emerging?

Wilsons retains exposure to the Growth, Value and Quality investment styles, with a current preference for Quality.

The Growth style is showing signs of life again in recent weeks, observes the broker. All things remaining equal, this style is expected to be favoured by a lower-growth environment.

Obviously, the growth stocks then need to deliver actual growth, and stock selection may end up trumping investment style, suggests Wilsons. As the market settles into a groove, the outperformance of the Growth or Value style may be less pronounced than it has been in recent years.

If Growth does reassert itself, the analysts expect a less dramatic, “Quality Growth” revival this time around, as opposed to the highly speculative growth phase witnessed in 2021.

Neither the Growth nor Value style seems to do well when rates are moving up at a pace that significantly threatens a recession, points out Wilsons.

Quality defensives such as consumer staples and healthcare tend to represent a safe place in such an environment, according to the broker, as evidenced during June’s share market correction.

The earnings for growth mega-caps in the US have held together reasonably well, and Wilsons expects the US reporting season will be an important milestone. The pandemic-induced fall in interest rates accentuated an initial outperformance for Growth, further boosted by unusual demand patterns.

In weighing-up reporting season results in the US, the broker feels market participants will need to weigh latent cyclicality of earnings versus earnings resilience. That is, the potential headwind for corporates from revenues pulled forward into the covid earnings boom, versus an ability to pass on cost pressures.

Morgan Stanley slashes forecasts for asset managers

Morgan Stanley cuts its FY23 earnings forecasts by -10-30% across its coverage of the Australian Asset Manager sector, due to lower assets under management (AUM).

Outflows are the key reason the broker reduces its valuation multiple for the sector. 

A broad recovery to inflows is unlikely and growth options are limited, according to the analysts, despite an improved investment performance across the group and less competition from passive investing in Australia compared to the US.

In seeking out limited growth options, Morgan Stanley suggests exposure to alternative asset classes, which may best be attained by investing in Macquarie Group ((MQG)), which is outside the broker’s asset manager coverage. 

ESG offers perhaps the best growth option within the broker’s coverage, and the analysts suggest Perpetual ((PPT) and Pendal Group ((PDL)) for this exposure. Product customisation/solutions offer another growth angle, with Janus Henderson ((JHG)) and Pendal Group recommended.

Morgan Stanley’s preferred asset manager under coverage is the Overweight-rated Perpetual, while the least preferred is Magellan Financial Group ((MFG)) which is rated Underweight. 

The broker likes Perpetual for expected growth in Corporate Trust funds under administration (FUA) and ongoing flows in Private Wealth. The Investments business also offers increasing global distribution, strong relative performance and progress on several growth options. These include broad ESG growth options and active ETF channels for retail.

Following Perpetual in order of preference (and with an Equal-weight rating), are Platinum Asset Management ((PTM)), Pendal Group and Janus Henderson.

The lower target prices set by Morgan Stanley may be viewed on the FNArena website, under Broker Call for July 26.

Lower claims growth for private health insurers

Claims growth is currently well below provisions set by insurers, which implies to Macquarie sizeable givebacks over the coming 12-18 months.

Using an in-house methodology, the broker estimates Private Hospital claims growth of 1.1% in the June half, compared to the 4.7% trend rate experienced pre-covid.

Macquarie expects net margins for the industry to contract by around -30bps this half compared to the June half, before increasing through FY23 as deferred claims liabilities are unwound.

While margins and claims for Medibank Private ((MPL)) and nib Holdings ((NHF)) are expected to outperform private health insurance (PHI) trends, the broker retains a Neutral rating for both companies on full valuations.

nib Holdings is preferred by Macquarie, given its skew to Travel and personal health information, which both have more rebound potential in the wake of covid.

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