In Brief: SMSF, Insurers, Grocers, Retailers

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Weekly broker wrap: self managed super funds, general insurers, grocery outlook, retail traffic decline

-Growth slows for self managed super funds
-Inflation and costs remain key headwinds for general insurers
-Analysts split over growth outlook for grocery segment amid ongoing inflation
-Retailers look to Black Friday performance

By Danielle Austin

Self managed super funds no longer the premier super segment 

Growth of self managed super funds (SMSFs) appears to have slowed significantly over the last five years. According to data gathered by Rainmaker Information,  total SMSF assets grew only 5.4% per annum in the five years to March 2022, while not-for-profit super funds grew at 10.1% per annum. 

SMSFs continue to hold $894bn for members and remain a significant source of capital for fund managers able to attract it, according to the information service. The Australian Taxation Office estimates that one in every five dollars, or $168bnm, held in an SMSF is pooled in a managed fund, life insurance policy or collective trust. 

General insurers benefit from improved investment yields 

Higher investment yields appear to be a tailwind for Suncorp Group ((SUN)) and Insurance Australia Group ((IAG)). This, coupled with ongoing price increases issued by both which should cover rising input costs, has driven Morgan Stanley to upgrade its earnings outlooks for both insurers. 

The broker sees ongoing inflation and rising reinsurance rates as pressing issues for these insurers. Morgan Stanley’s net underlying margin growth forecasts remain more modest than consensus, with the broker assuming a net underlying margin increase of 20 basis points in FY23 and 40 basis in FY24, accounting for headwinds. 

The broker remains Underweight rated on IAG, but upgrades its rating on Suncorp to Equal-weight from Underweight given improving capital flexibility and better market share. Morgan Stanley’s industry preference remains QBE Insurance Group ((QBE)). 

Conflicting outlook for supermarket sector

Analysts remain split over the outlook for the grocery sector. While Jarden is anticipating more than 5% growth for the sector in 2023, Morgan Stanley expects growth of only 2-3% as consumers tighten their spending. 

The latter highlights pressures continue to mount on consumers, and while consumer resilience to rising food inflation and cost of living pressures has surprised to the upside, the broker anticipates the consumer environment to become further challenged in the coming year. With this risk in mind, Morgan Stanley is Underweight-rated on Woolworths ((WOW)), Coles ((COL)) and Endeavour Group ((EDV)). 

Jarden notes its above-consensus growth forecast is underpinned by a return to eating at home, ongoing inflation, and an expectation of population re-acceleration in the second half of the year, all of which it expects to benefit grocery retailers. 

The broker anticipates Metcash ((MTS)) to be most exposed to upside, followed by Woolworths and then Coles. Jarden is Overweight-rated on both Metcash and Woolworths, and Neutral-rated on Coles. 

Retailer declines ahead of key trading periods 

Jarden’s retail tracker recorded a -14% year-on-year decline in online retail traffic in October. 

Notably, only the travel and soft goods segments demonstrated growth, up 147% and 4% respectively. The broker feels inflation is masking a slowing in base growth given a moderation in both web traffic and in store foot traffic over the month

While trading updates remain strong, the broker highlights an increasingly uncertain outlook for retail moving into key retail days. Jarden expects approaching Black Friday sales to be a key test, and an indicator of performance for the Christmas retail period.

The broker favours retailers with exposure to: consumers with discretionary cash and particularly younger demographics, including Universal Store Holdings ((UNI)), Accent Group ((AX1)), Premier Investments ((PMV)), Treasury Wine Estates ((TWE)), Reject Shop ((TRS)) and Domino’s Pizza Enterprises ((DMP)); retailers with defensive pricing power, including Woolworths, Costa Group ((CGC)) and Wesfarmers ((WES)); and retailers with growing return on invested capital, including Flight Centre ((FLT)).

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