Weekly Broker Wrap: RBA Rate Cut Tipped

This story features SEVEN WEST MEDIA LIMITED, and other companies. For more info SHARE ANALYSIS: SWM

-December cash rate cut tipped
-Media helped by advertising turn
-Deposit rates lift with ageing population
-Telco revenue to hold up

By Eva Brocklehurst

On Tuesday the Reserve Bank board will conduct it final meeting for the year and the countdown to the end of 2012 will begin. Will there be an official rate cut to add to the Christmas cheer? Well, the cash rate easing that many thought would materialise last month, and didn't, hasn't gone away. After more economic data showing a slowdown in mining investment is not being met by a concerted rebound in non-mining business plans, the major bank economists are still of the view that another 25 basis points reduction should be forthcoming, taking the cash rate to 3.00%.

Westpac economists certainly think another cut is necessary, noting the September quarter ABS survey on capital expenditure intentions was conducted after the iron ore price had recovered from its lows in August and September. Westpac said it would, therefore, be risky to dismiss this slowing in mining investment intentions as an over-reaction to the August/September panic in the resources sector. For ANZ economists there is little to suggest that non-mining capital spending will pick up from weak levels in the next few quarters. The RBA's business credit data for October has revealed that borrowing has been broadly unchanged over the past four months. As a result, the overall investment outlook now appears weaker than previously thought and ANZ continues to expect the RBA to lower the cash rate by 25bps on Tuesday and to maintain an easing bias next year.

National Australia Bank economists have plumbed for a cut in the cash rate too, although consider it still line ball. What's tipped the bank's call is the data released over the past month, which has all but confirmed a weak GDP outcome for the September quarter and provided little evidence of any improvement into the December quarter. The September quarter GDP figures will be published on Wednesday. Not helping the economy is a still high Australian dollar, despite the recent softening in commodity prices, which is keeping pressure on industries outside of mining. Softer commodity prices are also raising concern about the near-term outlook for mining. The inflation outlook remains consistent with the RBA’s 2-3% target, and should provide no barrier to near-term cuts. NAB economists still see potential for another cut next year, taking the cash rate to 2.75%. At this stage the bank's call is May 2013 but if the local data continues to deteriorate it could come as early as February 2013, after the RBA board's first meeting of the year.

CIMB goes out on a limb, saying this downgrade to mining capex should be in line with RBA projections and won't provide the trigger to ease monetary policy this week. Nevertheless, an easing is still expected down the track, just more likely after another CPI reading. The December quarter CPI will be published on January 23. JP Morgan's tip? It's Tuesday. The RBA has forecast an average growth pace of 0.7% quarter on quarter in the second half of 2012 and, JP Morgan believes, on the current trajectory, this will be proven ambitious.

CIMB, along the theme of an improving economy, has looked at media stocks this week and made Seven West ((SWM))  its top pick for any recovery. TV is the media segment that is most leveraged to any rebound  in advertising conditions and SWM (Buy, $1.90 target) is the pick for investors looking to play a recovery theme, given its strong ratings performance. Contrasting this is Ten Network ((TEN)) where the broker has a Sell rating and target of 27c due to dwindling market share and balance sheet risk, which offsets any potential cyclical upside. On the publishing side, Fairfax ((FXJ)) and APN News & Media ((APN)) are expected to benefit from a broader sector re-rating with an improvement in advertising conditions, although revenue gains will be muted by continued structural headwinds. For these two there is a Buy rating and a 90c and 85c target price respectively. CIMB notes TV advertising spending grew 18% in 2010 following the global financial crisis, versus the total ad market's spending of 11.8%. Southern Cross Media ((SXL)) with a $1.35 target is also considered a Buy on valuation grounds. It has a more variable costs base in regional TV and this makes it less leveraged than the metros to the TV ad cycle, CIMB said.

However, a firmer economy doesn't necessarily deliver a return to booming mortgage growth. CIMB has done some analysis showing that, as Australian households continue to age and a large part of the population enters retirement, mortgage penetration will be unlikely to increase as a share of GDP. The broker concludes that the slump in mortgage credit growth and the spike in the savings rate are structural trends, symptomatic of the ageing population, not cyclical fluctuations. That won't be turned around that soon.

Households where the prime earner is 45-54 have the highest total housing asset holdings and highest incomes. This group's housing share of total population peaked in 2005 and will keep falling until the early 2020s as these people increasingly buy financial assets (deposits and superannuation) and reduce debt. CIMB analysis suggests household demand for deposits peaks after 55 years of age. Selecting the 55-64 age group as representing peak deposit demand and the 20s as the lowest, and netting each share of the population off against each other, indicates deposit demand is strong until 2025, at least from a demographic standpoint. CIMB characterises the current loan growth environment as one in which mortgage lending remains structurally weak but somewhat offset by a soft cyclical recovery in business lending growth. This favours National Australia Bank ((NAB)) and, hence, is CIMB's preferred sector exposure.

Meanwhile, one area of the economy not dependent on the disposable income of age is telecommunications. Morgan Stanley has looked at whether the Australian mobile telco industry can continue to grow. Yes, is the answer but a disproportionate share of this growth may fall to the one with network superiority …Telstra ((TLS)). At any rate, growth at all is in stark contrast to European telecoms, Morgan Stanley maintains. The broker does not expect a significant increase in Australian telecom revenue as a percentage of GDP, rather that the blend will change and revenue will continue to hold up well. Mobile will increase its share as the old copper wire revenue decreases to zero and the National Broadband Network grows. Australian telecoms are attractive, according to the broker, as they currently offer investors a 5.8% average dividend yield, a 3% spread over 10-year Australian Government bonds. Telstra's spread at 4% (dividend yield at 6.8%) is considered sustainable over the medium term.

In the construction of portfolios, Morgan Stanley continues to recommend investors maintain a Hold position in Australian telecoms, particularly given sustainability of dividends. Furthermore, Australia's telecom sector is one of only six sectors in the Australian market to experience positive earnings revisions in the last three months. Telstra's positive earnings revision over the past three months was being driven by confirmation of NBN payments rather than mobile upgrades. Positive earnings revisions for the smaller telecom names have been driven by consolidation of the sector and the synergies that come from this. 
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms