In Brief: House Prices; Soft Landings; Copper Deficit

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House prices to continue to rise, consumer services overlooked; soft landing experience; copper deficit ahead.

-Rising house prices to drive economic growth
-Consumer services companies seen offering value
-Comparison to the Fed in 1995
-Copper demand to outstrip supply

By Greg Peel

Bet Your House

House prices in March rose for the 14th month in a row, notes Jarden, up 0.6% month on month and up 8.8% year on year. Overall, between a reacceleration in monthly growth rates, a rebound in auction clearance rates to the high 60% levels from the lower 60% levels in late 2023, and a further improvement in sentiment, the housing market appears to be reaccelerating after slowing into end-2023, the broker suggests.

We are also now seeing volumes lift materially, which could suggest upside risk to housing-sensitive parts of the economy, Jarden believes, such as household goods and renovations activity. While the broker expects the positive price growth trend to continue over 2024, the analysts do expect growth to moderate given the gap between prices and borrowing capacity, and increased volumes.

Jarden’s base case assumes no RBA rate cuts until February 2025, with APRA leaving the 3% serviceability buffer in place, but earlier easing would represent material upside risk. The broker estimates each -50 basis points of cash rate or buffer cuts are worth around 4-5% for house prices.

While Jarden does not think the recovery in the housing market will have much bearing on the RBA's rate decisions in isolation, it could have an impact on the timing of rate cuts if it flows through to a broader economic recovery. In particular, the broker believes the housing recovery – once combined with tax cuts and improving consumer confidence – could support consumer spending in the second half of 2024.

Set for Take-Off

The earnings results of companies selling consumer goods were a standout in the recent reporting season, Wilsons notes. Consumer services companies (travel, fast food, gaming) on the other hand, especially fast food and travel, have underperformed the retailers over the past six months.

The market may be overlooking consumer services, Wilsons suggests. These companies still boast above-average earnings growth potential, and valuations look attractive at current levels in the broker’s view.

Looking forward, the possibility of a soft economic landing coupled with improving consumer sentiment suggests a positive outlook for consumer services over the next 12-24 months.

As such, Wilsons is increasing its allocation to the consumer services sector through the addition of Webjet ((WEB)) to its model portfolio.

Webjet presents a compelling investment opportunity, the broker believes. The company boasts superior fundamentals relative to its peers, with strong metrics like high net profit margins, return on invested capital, and a healthy net cash position.

Webjet’s price/earnings-to-growth (PEG) ratio of 1x suggests it offers growth “at a very reasonable price”.

Webjet joins incumbent portfolio components Aristocrat Leisure ((ALL)), Collins Foods ((CKF)), Corporate Travel Management ((CTD)), Domino’s Pizza ((DMP)), Flight Centre ((FLT)), IDP Education ((IEL)), Light &Wonder ((LNW)), Star Entertainment ((SGR)) and Tabcorp ((TAH)).

Like it’s 1995

The Fed is becoming more confident a soft landing scenario is nicely materialising, notes CIBC Capital Markets. Escaping the tight hold of the Fed without entering a recession is not easy, CIBC points out, and is rare.

In all likelihood, the economy could have landed softly in 2020 but then covid happened. So we have to go back to the 1995 episode — the only soft landing in the post war era — to assess not only to what extent the conditions in the first half of the 1990s were similar to today’s situation, but also to get a sense of what might await us at the end of the runway.

Of course, no two cycles are the same, CIBC admits, but the striking similarities between now and then make this exercise worthwhile.

Toward the end of 1993, the US economy was recovering from the savings & loans crisis and the 1991 recession. The unemployment rate was falling rapidly and the capacity utilisation rate was rising fast. Both indicators were approaching levels that, back then, were thought to trigger an acceleration in inflation.

The Fed made its first move in January 1994 and had raised rates by 300 basis points to 6.05% by early 1995. There were some small rate adjustments in 1995, but in many ways, this was the first post-war experience of “higher for longer”, CIBC notes. Importantly, in 1994, inflation was trending downward at the time of the first hike with then Fed chairman Alan Greenspan chasing phantom inflation out of a fear of being behind the curve.

In the current situation, the first move by the Fed was trigged only after actual inflation was very evident. (The Fed has been universally accused of having been way behind the curve).

The sequence of events back then was very similar to what we have seen since 2021, CIBC points out. The tightening cycle was preceded by a major sell-off in the long-end of the curve in 1993, with the ten-year bond rate rising by 260 basis points. In the current cycle, the bond market correction was, of course, more ferocious.

But back then, like now, the US economy did not succumb to the Fed’s pressure in a way consistent with such a rapid tightening trajectory. The economy of the mid-1990s did indeed slow in response to the Fed’s moves, but it stayed well clear of contraction, with real GDP growth bottoming out at a 2.2% annual pace in the fourth quarter of 1995.

In conclusion, CIBC suggests the US economy is showing promising signs of achieving the second soft landing in peacetime history. The similarities to the 1995 situation are very clear and shouldn’t be ignored. At the margins, those similarities are consistent with a moderate easing trajectory by the Fed and potentially strong productivity-led, non-inflationary growth.

Call the Doctor

In a challenging year to date for the resources sector as a whole, copper has been one of the standout commodities of 2024, Wilsons notes, with spot prices approaching 12-month highs.

The recent rally in the copper price has been driven by the pull-forward of expectations of market deficits into 2024 following significant supply cuts in recent months.

Leaving aside copper’s strong long-term demand outlook (energy transition will drive a demand step-change, the broker suggests), from a cyclical perspective the global macro environment is also supportive of copper demand over the next 12 months.

With interest rate cuts from the Fed expected this year and a soft landing scenario likely for the global economy, Wilsons believes demand for copper should be well-supported given its range of industrial uses, such as in construction, consumer goods, machinery et cetera (and let’s not forget EVs). The copper price is also poised to benefit from a weaker US dollar.

Supply cuts from some of the world’s largest copper producers have been the central driver of the dramatic shift in copper’s near-term supply/demand dynamic, the broker notes, with a meaningful deficit now expected this year, which contrasts to previous expectations of a surplus in 2024. Several large projects have faced political, social, and operational disruptions, removing significant supply from the market.

Wilsons point out there is a downward trend in the rate and size of major copper discoveries. In the five years to 2022, copper discoveries have totalled 4.1mt, representing a significant decline from the 70.6mt of discoveries between 2013-2017, and an even greater decline compared to the long-run trend.

As such, the existing pipeline of new copper supply will be insufficient to meet future demand. The IEA forecasts a supply deficit of some -2.8 mt in 2030 under the global (developed economies) net zero carbon emissions scenario. Moreover, there are downside risks to supply amidst widespread delays and cost overruns on planned developments, as evidenced in recent months.

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