In Brief: Global Inflation, Australian Equities, GDP Growth, Digital Mortgages

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Weekly Broker Wrap, In Brief: Global inflation continues, domestic equites likely spared geopolitical dip, household spending to drive economic growth, opportunity in digital loan adoption.

-Economic impacts of the Russia-Ukraine conflict not enough to halter global inflation
-Australian equities are likely to avoid global declines based on historical geopolitical events
-Less saving and more spending to drive economic growth in the coming year
-Lenders look to digital loan capabilities for improved scale, cost and efficiency

By Danielle Austin

Global rate rises ahead as inflation continues

The Russia-Ukraine crisis appears to have spurred on global inflation, observes Danske Bank, with inflation rising 7.5% and 5.1% in the US and European countries respectively in January.

The bank predicts the US Federal Reserve will need to raise rates at every meeting this year and the European Central Bank will issue a 25 basis point hike in both December 2022 and March 2023. Elevated energy pricing, a result of the conflict, appear to have exacerbated inflation as the risk of a more persistent inflationary environment increases.

Danske Bank also suggests the increased risk to global growth from the conflict is unlikely to derail the economic expansion in the coming year. Limited exposure to both Russia and Ukraine will likely soften economic blows, with a decline in Russian trade in recent years beneficial to markets. The European economy appears most at risk given proximity.

Investor opportunity in equities given historic conflict avoidance

Given Australian equities typically don’t bear the brunt of significant global geopolitical events, broker UBS suggests a negative market reaction could offer a buying opportunity for investors.

Australia benefits from limited exposure to both Russia and Ukraine, with relatively minor trade links but UBS analysts note the conflict will drive slowing growth and increasing inflation globally and could drive a faster path to stagnation for equities.

Notably, typically domestic equities historically take a -0.1% tumble in the week following a geopolitical event, before recovering over following months. Further, resource stocks typically outperform during these events, with gold, mining and energy equities faring best, while financials and insurers tend to underperform.

While UBS expects any domestic market reaction to be relatively subdued, the broker also warns predicted post-covid recoveries will likely be weaker than initially expected. The broker reduced its year end market target for the S&P/ASX200 index to 7700 from 7800.

Australian economy to grow despite global declines

The Australian economy could benefit from a 5.5% gross domestic product lift by year end according to predictions made by Westpac ((WBC)). The bank anticipates savings rates will normalise to 6% by year end while household disposable income increases 2.5%, equating to a 8% lift in household spending, providing a notable boost to economic growth.

After a period of high savings rates, the national household savings rate fell to 13.6% from 19.8% in the final quarter of 2021 as the New South Wales and Victorian economies reopened for business, funding 6.3% consumer spending growth.

Westpac expects savings rates to decline below a normal 6% in 2023, and that household spending growth will slow to 3.2% and 2.2% in 2023 and 2024.

The bank does warn interest rate rises in the second half of the year may increase consumer caution, as house prices decline and inflation remains high, and expects these pressures to shape the economic outlook of 2023.

Economic growth next year will further be supported by continued government spending, with the bank predicting 3.7% growth as state governments commit to sizeable public transport initiatives, and housing construction and renovations will also continue to benefit the economy.

The bank noted while geopolitical conflict in Europe looks to weigh on global growth, the immediate impact to Australia has been through higher energy and base metal prices and that has benefitted Australia's overall trading environment.

Opportunity remains in digital mortgaging

Australia's neobanks are setting themselves apart from the majors through the early adoption of digital home loan capabilities, and UBS analysts note there remains sizeable potential in the product offering from increased customer take up.

While the digital loan market looks to settle around $6.0bn in loan originations in FY22, digital mortgages have so far failed to take significant market share and account for just 3% of the overall home loan market. Comparatively digital mortgages in the US account for 30% of the market.

Savvy neobanks look to be targeting younger, likely more digitally literate, first-home buyers as early adopters of the technology, posits UBS, with growth of online mortgages heavily dependent on the digital adoption and comfort of consumers. Tic: Toc, Athena, Nano and 86 400 all offer access to a digital home loan application that is completed in less than twenty minutes, with some further incentivising the use of digital applications through lower deposit loans to improve competitive advantage.

Digital loan capabilities offer improved scale, cost and efficiency for traditional banks, and the majors are either building out or acquiring the necessary software to keep up with neobank peers. As highlighted by UBS, many existing online platforms offer limitations around loan value ratios or home type and size, making them suitable only for simple mortgage applications.

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