In Brief: Midterm Elections, Banks, Iron Ore, Telcos

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            [6] => ((FMG))
            [7] => ((CIA))
            [8] => ((DRR))
            [9] => ((TLS))
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            [8] => DRR
            [9] => TLS
            [10] => TPG
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This story features ANZ GROUP HOLDINGS LIMITED, and other companies.
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Weekly broker wrap: US midterms drive higher returns, deposit pricing margins moderate, iron ore remains weak, fibre assets hold value. 

-US midterms likely to strengthen index returns, but not a primary performance driver
-With deposit spreads moderating, upside margin risk looks unlikely to last
-Weak iron ore outlook presents investor entry point
-Unlocking value in fibre assets a key focus for telcos 

By Danielle Austin

Equities likely to benefit from midterms

While Citi anticipates the midterm elections to carry tailwind risk for US equities, it does not expect the event to be a primary driver in the coming year.

Rather, the broker expects rate policy, inflation and recessionary risks to be determining factors, despite the S&P500 typically reporting strong returns growth of, on average, 20% in the year following a midterm. Notably, even in post-midterm years where an economic recession was experienced, returns were strong. 

With polls pointing to the Republican party gaining control of both the House and Senate, some form of split government is anticipated, reducing the likelihood of large-scale policy reform and subsequent index level impacts.

Margin upside from high deposit pricing cannot last

Elevated deposit pricing has continued to provide meaningful upside to bank margins in the first half, and while deposit spreads are starting to moderate. Macquaire sees attractive liability spreads as providing scope for further margin upside in the second half. 

Macquarie’s data suggests banks are gradually lifting deposit rates, and spreads are contracting. The broker expects the sector to be relatively defensive through an earnings upgrade cycle. 

Among the majors, ANZ Bank ((ANZ)) reported the steepest housing book growth in September at 1.2x system growth, while National Bank ((NAB)) lagged its peers at 0.3x system growth, and regionals continue to struggle. National Bank and Commonwealth Bank ((CBA)) are Macquarie’s preferred picks among the majors, while Bendigo and Adelaide Bank ((BEN)) remains its preferred regional. 

Iron ore looks weak near term, but offers investor opportunity

Citi expects iron ore pricing will remain weak near term, lowering its fourth quarter price assumption to US$70 per tonne from a previous US$95 and its 2023 average to US$95 per tonne from a previous US$110. Weak demand not only from China, but globally, has made Citi more cautious on the outlook for iron ore over the coming six months, and drives Citi’s downgraded assumptions. 

With share prices declining, the broker sees an attractive entry point for investors should its economic forecasts prove correct. While its updated price deck does not change its rating on any of the iron ore producers in its coverage, the broker has made target price adjustments. 

Citi retains Rio Tinto’s ((RIO)) target price of $115.00 but reduces earnings per share -16%, and similarly retains Mineral Resources’ ((MIN)) target price of $86.00 and reduces earnings per share by -7%. Fortescue Metals Group’s ((FMG)) target price decreases to $16.70 from $17.00 and earnings per share decline -31%, Champion Iron’s ((CIA)) target price decreases to $6.70 from $7.50 and earnings per share decline -41%, and Deterra Royalties’ ((DRR)) target price decreases to $4.70 from $4.80 and earnings per share decline -13%. 

Fibre assets hold substantial value for telecoms 

Unlocking value in fibre assets has been a key focus of domestic telcos recently according to UBS, which feels asset monetisation could offer substantial earnings upside to Telstra ((TLS)) and TPG Telecom ((TPG)).

The broker sees substantial value in Telstra’s TLS InfraCo and TPG Telecom’s Vision Networks, estimated the fibre assets could demand prices 15.7x and 13.0x FY23 earnings respectively, or $25.7bn and $722m. 

The broker also expects both telcos to be beneficiaries of market share shifts, anticipating increased churn from Optus following its recent data breach. UBS expects Telstra will maintain its dominant mobile subscriber share, and that TPG Telecom will grow its share to 17.0% from 16.2%. 

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