Weekly Broker Wrap: Macro Outlook, Consumer, Property, Hotels, Gas And Insurance

This story features HARVEY NORMAN HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: HVN

-Policy support needed for growth
-Consumer positive, despite election
-Declining A-REIT development returns
-War footing with hotels and online agencies
-Flaws in gas reservation policy?
-NZ insurance growth under pressure
 

By Eva Brocklehurst

Macro Outlook

Macquarie suspects the Reserve Bank of Australia will need to cut the cash rate further, to 1.0% from the current 1.75%. Recent weak inflation adds to an already subdued outlook and the broker's former risk case is now the base case.

Domestic demand appears weak and the broker perceives additional policy support is needed to sustain current household spending growth, as support from wealth effects wane.

Macquarie believes it will be harder now to generate and sustain inflation near the RBA's target of 2-3.0%. The broker lowers its long-run inflation target to 2.0% from 2.5% and long-run nominal 10-year bond rate assumption to 3.25% from 3.75%.

Macquarie forecasts a sub-2.0% 10-year bond yield forecast to reflect the new record low in the cash rate, but does not make significant downward adjustments to growth. Growth remains narrowly focused with resource exports the main driver, while domestic demand is muted and fiscal policy points to further consolidation.

The broker also expects the recent strength in the Australian dollar will have a dampening effect on the economy in the first half of 2016 and that further depreciation in the currency is required to secure the transition in the economy.

Australian Consumer

Deutsche Bank contends that elections are not that bad for retailing. The election drag on total retail sales growth is calculated to be a modest 30-40 basis points.

The mid year timing of the upcoming election should also be less of a negative because it won't disrupt Christmas trade, although the impact could be greater if a clear result is not forthcoming. The broker continues to believe the consumer is relatively positive, given low inflation in non-discretionary items such as petrol, rent and utilities.

Deutsche Bank believes Harvey Norman ((HVN)) and JB Hi-Fi ((JBH)) will trade well because of the strong housing market, a favourable product cycle and the exit of competitors.

Australian Property

Morgan Stanley is questioning the pay-out ratios of retail Australian Real Estate Investment Trusts (A-REITs). Declining development returns are expected to lead to an increasing proportion of capex being used for maintenance purposes.

The broker suspects this may place downward pressure on pay-out ratios, which are currently among the highest globally. The most vulnerable is Vicinity Centres ((VCX) as the company has an expanding tail of underperforming assets.

These could result in further dilution to free funds from disposals beyond current guidance and, if the company reinvests capital into these assets on marginal returns, it will place downward pressure on the pay-out.

Morgan Stanley recommends a switch from Vicinity Centres to GPT Group ((GPT)) given its distribution is covered by cash and the growth prospects are superior.

Hotels And Internet

Hotels have ramped up their online push to reduce the growing share of online travel agencies. As a result, Morgan Stanley observes global brands such as Hilton and Marriott have demanded lower commissions and removed last room availability signs in online sites.

They are encouraging loyalty members to book direct in return for cheaper rates. These brands are then being pushed down in the online agencies' search order.

Given the shifts in the industry the broker expects both earnings and multiples are changing. At this juncture, the case can be made for either side being the winner but the broker envisages potential for 15-30% in share price impact, either positive or negative, for hotel brands and the agencies and this could quickly put a business model at risk or create a price war.

Domestic Gas

The ALP plans to introduce a country-wide gas reservation policy for future LNG projects, which would extend Western Australia's current policy to the east coast, with the intention to reduce the impact of rising prices for the manufacturing sector.

Ord Minnett doubts the efficacy of such a policy, given price increases have been mainly driven by cost inflation and not export parity. The broker believes the relatively high cost of transporting gas currently insulates the southern states from export parity prices.

East coast gas reserves increased to 47,000PJ in 2016 with most of the development underpinning the three LNG projects on Curtis Island. The broker believes the additional requirements on gas producers could stymie much needed reserve developments while east coast reserves are sufficient for just 7-8 years at current rates of use.

NZ Insurance

There is no joy in the trends for general insurance in New Zealand, Macquarie observes. General insurance growth is under pressure and pricing is competitive.

There have been a large number of new entrants in the market and these have focused on commercial lines. AWAC, BHSI and Ando have all been taking market share in commercial, resulting in price pressure.

Meanwhile, personal lines are highly concentrated. Outside of Suncorp ((SUN)), Insurance Australia Group ((IAG)) and Tower ((TWR)) there are few other carriers underwriting personal lines in the country. Macquarie notes IAG has the greatest relative exposure to NZ in general insurance stocks under coverage, at 47% of premiums.
 

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