The Wrap: Health Insurers, RBA & Super

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Weekly Broker Wrap: health insurers; slot manufacturers; RBA; superannuation; and global debt.

-Health insurer valuations factoring in minimal risk of regulatory scrutiny
-Aristocrat Leisure still ahead among slot manufacturers
-UBS forecasts official cash rate cut at year end, but could be earlier
-Morgan Stanley concerned about build up in corporate debt in US, China
 

By Eva Brocklehurst

Health Insurers

UBS believes investors are now less concerned about the impact of the Australian Labor Party's proposed policy to limit price increases for health insurers at 2% for two years.

Valuations appear to factor in minimal risk for greater regulatory scrutiny of the premium setting process and profit margins. The broker disagrees with this complacency and cannot envisage how the issue of profitability will avoid the regulatory spotlight indefinitely.

Medibank Private's ((MPL)) net margins appear to be heading for a fourth year above 8% but the broker was most surprised by the change in the first half at nib Holdings ((NHF)), where margins widened sharply and expenses were buffered.

Policy holders may be receiving better service and benefits but on the issue of price the broker finds little evidence the spoils are being shared. Both companies' approved pricing has been higher than industry, post privatisation.

UBS considers the valuations are out of kilter and remains underweight on the sector. The broker has a marginal preference for nib and has a Neutral rating, with a Sell rating on Medibank Private.

Slot Manufacturers

Macquarie analyses the performance of slot machines within Australia, which it believes provides insight into market share for outright sales. Aristocrat Leisure ((ALL)) continues to outperform with its new games delivering 1.6x floor averages, supported by the Dragon and Lightning series.

In January, two titles from these series were released in Victoria and already are top performers. Macquarie is increasingly confident Aristocrat Leisure can capture greater share in North America.

Ainsworth Gaming ((AGI)) continues to moderate and its performance was -34% below floor averages in January. Macquarie is encouraged by the release of Kanga Cash in Queensland, which is performing strongly, albeit on low installations. The broker finds the step-up in the company's R&D positive but expects new products are some time away, given lead times are more than 12 months.

Reserve Bank

UBS expects the Reserve Bank of Australia to reduce its official cash rate by -25 basis points in November 2019 and February 2020, taking this rate down to 1.00%. This view is based on a tightening of credit playing out amid ongoing falls in housing prices and a negative household wealth affect on consumption.

Although the labour market remains solid, the broker points out this is a lagging indicator. UBS expects below-trend GDP growth of 2.3% in 2019 and unemployment to rise to 5.25% by the end of the year.

Could the RBA cut earlier? UBS considers this the main risk to its view. A modest rise in unemployment is likely to be needed for a rate reduction and the broker points to commentary from RBA governor Philip Lowe, who stated it was possible that the economy was softer than expected and that income and consumption growth will disappoint.

The governor also signalled that, in the event of a sustained increase in unemployment and lack of further progress on the inflation objective, lower rates might be appropriate.

UBS suspects that inflation will move under the central bank's 2-3% target band and could be enough to bring an easing of official rates even further forward.

Moreover, the RBA is expected to again downgrade the GDP outlook in May. The main upside risk to GDP is considered to be the budget from the federal government, given this is already tracking $3bn ahead of the mid year economic and financial outlook (MYEFO).

Superannuation

Analysis by Rainmaker Information, which provides marketing intelligence and financial services information, has found that of the 28m superannuation accounts that safeguard over $2.7 trillion in assets, over 5m accounts are likely to have their fees reduced to less than 3%.

This view stems from the legislation that passed through the Senate. AMP ((AMP)), Hostplus and ANZ OnePath appear to be impacted the most, with accounts under $1000 representing 34%, 32% and 41% of their totals respectively.

The researchers note that many of Australia's super funds have thousands of small accounts that are owned by young people. For these members who are just starting out, if the fund has a flat dollar fee, it can translate into extremely high percentage rates. The legislation is considered a win for these consumers.

Global Debt

On Morgan Stanley's calculations global debt was stable at an elevated level of 226% of GDP in 2018. After rising for six consecutive years over 2010-16 this marks the second year that ratios have stabilised.

China remains the driver of global debt dynamics and the recent stabilisation in ratios is supported by that country's successful de-leveraging of its corporate sector. Elsewhere, there was a slight uptick in non-financial corporate and public debt, offset by a decline in household debt.

However, Morgan Stanley notes China has stepped up the pace of its policy easing and other central banks have also become more dovish. Hence, while global growth is likely to improve from the second quarter of 2019, the broker suggests local debt ratios will also rise, led by China and developed market public debt.

Three areas of risk stand out, including corporate credit risks in the US and China, and external funding risks for selected emerging markets. Morgan Stanley is particularly concerned about the rapid build in debt in the corporate sector in the US and China.

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