Weekly Broker Wrap: Oz Savings, TV Ads And Housing; China, US Reforms

This story features BORAL LIMITED, and other companies. For more info SHARE ANALYSIS: BLD

-Aust savings rate an illusion
-TV ad budgets bleeding to online
-Sustained Aust housing rate needed
-China reform proposals
-US growth being held back
 

By Eva Brocklehurst

The official Australian household savings rate is 10% of income but Credit Suisse disputes this rate is showing a healthy position for consumer spending. This is a high rate by international and historical standards but the measure overstates discretionary saving, in that it includes compulsory superannuation and principal payments. Removing superannuation substantially lowers the savings rate to 2% from 10%. Accounting for principal payments lowers it further, to minus 3.6%. Hence, the pool that households can draw on to spend more is an illusion.

The general view is that households run down savings as interest rates are reduced and asset prices rise. Accordingly, consumption should grow faster than disposable income in the months ahead, enabling Australia's economy to move away from mining-led growth. Contrary to this notion, and because the official rate overstates the case, Credit Suisse thinks households are not saving much at all and therefore not in a position to increase spending. The discretionary saving rate is currently below the long-term average.

Moreover, even supposing that asset prices rise a little, further reducing the need for households to save income, the analysts find it hard to see the savings rate falling materially, because lending standards are tighter than before. So, either a major easing of lending standards, or a very strong increase in asset prices, is needed to persuade households to spend more. Over the next few years, the economy is likely to experience a drag from reduced mining investment. At the same time consumer demand will be patchy. Overall, it's low economic growth that's on the cards in Credit Suisse's view, and the risk to interest rates is to the downside.

Despite the tremendous growth in online advertising over the past 10 years, Citi researchers believe the majority of this growth has been derived from budgets for magazines, newspapers and direct response channels, such as mail. Top brand advertising, which is concentrated on TV, represents a significant and largely untapped market for online growth, at $62 billion. The researchers looked at survey data recently released by Adap.tv and Digiday that suggests marketers are increasingly looking to shift TV advertising spending to the internet.

This is consistent with Citi's observations of the industry and forecasts for online video advertising growth. Brands are allocating an increasing mix of spending to online video and tapping into budgets for TV broadcast, online display and print. Interestingly, what is holding back spending online is the ability to measure reach, target and performance across platforms and devices in a uniform way.

Australia's housing market is in recovery. How strong it becomes is the next guess. The recovery is led by NSW and Western Australia and characterised by falling housing starts in Victoria. Morgan Stanley suspects, for peak cycle numbers of 180,000 starts per annum to be achieved, Victoria needs to rebound. The broker sees downside earnings risk across the majority of the sector but earnings momentum is turning positive. This is strongest for Boral ((BLD)) and CSR ((CSR)). CSR has risks on the aluminium front but Morgan Stanley thinks the stock's leverage to a residential earnings recovery is underestimated.

Housing needs to be robust enough to be sustained for some time. Domestic building product margins have been in decline for the past decade and the peak in starts has not historically been enough to see a sustained recovery in margins. Morgan Stanley's base case is for housing starts to improve to 170,000 in FY14, peaking at 175,000 in FY15 before falling to 165,000 in FY16. The broker would be more positive about the sector if there's signs a residential recovery can last over three years, supported by low rates.

Rates are expected to remain on hold for the next 15 months, which would support a multi-year recovery, but it's too early to price this into stocks. Morgan Stanley wants to see, for sustained outperformance, a longer cycle than past cycles, such that utilisation and price flows through to earnings. The largest downside earnings risk is for those most operationally geared to a recovery such as Fletcher Building ((FBU)), Boral, CSR and James Hardie ((JHX)). There's less earnings risk seen for DuluxGroup ((DLX)) and Adelaide Brighton ((ABC)).

Reform proposals by an influential Chinese think tank will from the basis of a reform policy to be announced at the third plenary session of the eighteenth Chinese Communist Party Central Committee meeting on November 9-12. AllianceBernstein strategists suspect that even a 50-70% success rate for the proposals would contribute substantially to the long-term development of the country. The reform proposals include changes to state-owned enterprises and government reforms to reduce state monopolies, inviting private sector competition in strategic areas such as telecommunications, oil and gas, power generation and banking. They also call for tax reforms, including the introduction of a property tax and changes to the value-added tax to move to consumption bases from production.

The reforms are aimed at achieving a better balance between local and central government revenues and include a land reform, which will allow rural and farm land under collective ownership to be sold at market prices. The proposals highlight the importance of the opening of the Chinese currency, the renmimbi (RMB), and an endeavor to make it a major currency for trade settlement as well as a reserve currency in Asia within 10 years.

Although the US economy continues to grow modestly, the pace has not yet accelerated to levels that might be expected during an expansion. In AllianceBernstein's view, issues related to fiscal policy are partly to blame and  upcoming budget and tax debates will likely determine growth trends in 2014. Implementation of the new health care law has added a layer of confusion. At the margin it will raise cash outlays for existing health policy holders but people who are required to purchase new or revised plans in 2014 may face even larger expenses. It's hard to quantify the incremental burden on the US consumer but, based on AllianceBernstein's estimates, workers will be asked to pay a greater share of overall health care costs.

The recent US government shutdown, with almost 800,000 federal employees laid off for 17 days, will also have a dampening influence on the rate of economic growth in the current quarter. Not only did it disrupt activities directly it also weighed heavily on consumer confidence. Although the loss of output could reach as much as 0.5% annualised in the fourth quarter, the economists think it will be fully recovered by the first quarter of 2014.

Perhaps the biggest headache for the US government, and curtailing growth, is discussions on the budget and taxes. AllianceBernstein doubts that the tax reform negotiations can make any advance in the short term. US businesses will have to wait at least another year, or maybe longer, before Congress approves fundamental tax reform legislation. The growth opportunity is being lost because businesses would be willing to commit more investment to the US if they were confident that the outdated tax code was being reformed to welcome more capital.
 

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