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

Weekly Reports | Nov 04 2022

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. 


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