Weekly Broker Wrap: Election, Retailing, Oil Prices And Fertiliser

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-De-bunking election myths
-Feeling brave on retail stocks?
-Oil crisis? It's Libya not Syria
-Fertiliser prices getting damaged
 

By Eva Brocklehurst

Goldman Sachs has put to the test the idea that federal elections delay spending and depress financial prices. A post-election spending recovery is often expected but the myths are being de-bunked. The analysts have found little evidence that the passing of a federal election spurs spending, confidence and asset prices. In particular, historically, should a change in government occur, it has not been a panacea.

Typically, the Australian dollar declines, equity markets decline, bond yields rise, and the path of economic indicators is mixed in the months following the election result. Indeed, the assumption that elections lower confidence and delay spending in the lead-up to poll date is not supported by the economic data. Elections that result in a change in government tend to be followed by a period of slower, rather than accelerated, economic activity.

Will September 2013 be different? The analysts think not. Economic data ahead of the 2013 election is weaker than before the prior seven elections but what is really different this time is a lack of big spending promises that benefit the consumer. All up, it is unlikely that business conditions will recover materially without a broad-based recovery in consumer spending, while slowing household income growth suggests a cautious consumer will persist. Recent easing in financial conditions and the rise in household wealth through 2012-13 will be a help, but the lags from both forces are long and in the interim they will have to navigate a decline in investment spending and the prospect of further fiscal drag. In the end, the economic cycle prevails.

After three years of weakness, house prices rose 5% in the June 2013 quarter. The last big retail upswing, in 2007, was correlated with high house price growth. Is there cause for optimism? Citi suggests net wealth is still not back to those highs so it's wise to be cautious. Nevertheless, 10%-plus house price growth could lead to a short-term retail upswing. Shoppers may spend up on their credit cards if they feel wealthy.

Credit growth is key. Citi notes the Australian savings rate is 9.8% of household income. If retail spending is going to accelerate, it won't come from income growth, it will come from reduced savings and more credit card usage. Over the last fifteen years, credit card spending growth averaged 15% per annum. In the past 12 months it was only 6%.

What stocks does Citi advocate for the brave? Given any sales uptick could be short-lived the broker thinks Harvey Norman ((HVN)) and Myer ((MYR)) are best placed to benefit from rising household wealth. The sales correlation here with house prices is strong and the upside in price/earnings could be significant should house price growth accelerate further.

 A word of caution. This time it may be wise to be cautious because wealth may not kick spending along so much this time. Debt levels are still very high and there is weaker household income growth because of rising unemployment and living costs. Moreover, these particular retailers are mature and need to close stores and deal with the increasing online competitive presence, in Citi's view.

The escalation of conflict in Syria is not likely to drastically alter the fundamentals underlying the current oil market. It has potential to drag other oil producers in the region into its web and that is where the danger lies. Under that scenario, oil prices could push above US$120/bbl (WTI), in CIMB's opinion. Despite the headlines around Syria, in terms of oil, it is a small producer. Production has fallen to around 120kb/d in recent months. In the context of global supply, at its peak in 2011, Syria's output represented only 0.5%. At current levels this share falls to 0.12%.

One possible scenario of a widening conflict is some disruption to Turkish exports. The port of Ceyhan (80km from the Syrian border) accepts both the Baku-Tbilisi-Ceyhan (BTC) and Kirkuk-Ceyhan pipelines, with a combined capacity of 1.8 Mb/d. The other unknown is the extent to which Syria, Hezbollah and Iran will retaliate if the US or the UN do enter the conflict. While Iran or Syria are not expected to retaliate in any major way, CIMB suggests attacks on Israel cannot be ruled out. Either way, it raises the geopolitical risk premium being applied to oil prices.

What has been overshadowed by Syrian news is the fact there is unrest in Libya and Brent crude has risen above US$110/bbl on the back of disruptions to Libyan oil exports. While the actual disruption to Libyan oil output is unlikely to worry the markets, again, the potential of the conflict widening is a concern. The new government has been unable to disarm the militias and thus armed labour actions and other incidents have been increasing in regularity in recent weeks.

Fertiliser prices are getting damaged as well and the outlook is bearish for producers in the short term. Citi finds four factors at work, which have seen the market go from one extreme to the other in just a few months. These are: Uralkali's decision to kick off a potash price war by switching to volume over price; lower grain prices suggesting farmers will become more conservative in plantings; the fall in the Indian rupee, which is likely to delay and possibly reduce fertiliser imports; and the expansion of urea production in China and sharp increase in exports. Just how much the potash price has been affected will be seen as volume buyers return to the market in September. Citi thinks urea pricing is close to trough levels, roughly at Chinese production costs. The phosphate outlook is uncertain given the dependence on Indian demand.
 

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