Weekly Broker Wrap: Tax, Crops, Budget, Earnings Risks And Advertising

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-Tax burden douses confidence
-US corn, soybean prices overshot
-Oz budget may dampen spending
-Where's the FY15 earnings risk?
-Cinema poised to gain ad share
 

By Eva Brocklehurst

Macquarie observes that tax burdens have been rising on labour income in the world's major economies, as governments seek to rein in budget deficits. According to OECD statistics, personal income tax has increased in 25 of the 34 member countries over the past three years. Macquarie suspects that the increased tax burden amidst declining real wages will produce a negative effect on consumer confidence and growth in domestic demand.

The analysts maintain that, if taxation burdens on labour continue to rise, this will disrupt recovery in household balance sheets, reduce consumption taxes, increase income inequality, and constrain investment and GDP growth in the long run. Macquarie concedes many countries need to cut down on unproductive spending – increased as a result of the global financial crisis – and raise tax revenue. What the analysts question is the increased taxation of labour income.

Taking the OECD analysis on Australia, Macquarie notes the single average worker faced an increased tax burden of 0.8 percentage points between 2011 and 2013, higher than the OECD average of 0.3 percentage points. The average tax burden for single income couples with two children rose by 2.7 percentage points in those years compared with the OECD average of 1.4 percentage points.

What's important, in the analysts' view, is evaluating the implications of rising tax burdens on labour income, prior to resorting to tax-biased methods of fiscal consolidation. They believe policy reform for OECD countries should come via: implementing more progressive taxes, so that lowest paid workers face low marginal tax rates without discouraging labour force participation; shifting tax bases towards consumption to increase employment and reduce the efficiency cost to taxation; using tax polices to affect the number of hours worked rather than the participation choice; and increasing taxes on natural resources and energy consumption, in order to minimize the negative externalities on economies.

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From one dry area to another. Macquarie's agricultural analysts note cold temperatures in the US have delayed corn planting but this has now started to pick up and the recent rally in corn prices may have caused farmers to increase their intended corn seeding area. Soybean plantings have just begun but the analysts are concerned at the late heading of winter wheat, developing at the slowest pace for the last 20 years. In the areas where soybeans follow on this could inhibit the farmer's ability to plant. The analysts note the delays have allowed a risk premium to remain in place but they remain bearish on soybeans, believing prices have overshot and are liable for correction, led by corn. As the farmer starts planting he starts hedging and this should drive a correction in prices. If reasonable pollination in soybeans and blooming in corn ensues, then a sharp dip in prices is expected at the end of the year.

Dry conditions in the southern US have meant some loss of wheat production is near certain. The cold winter and slow emergence of the crop from dormancy means there has been more time to see if rainfall can help in the critical growth stages. While a drop in US wheat production is likely, the analysts expect it to coincide with a large drop in demand because of a far smaller import program from China. Nevertheless, US wheat prices could be supported by any meaningful Chinese import volumes. This is because, if the El Nino develops as expected in in the southern hemisphere this winter, the Chinese may be compelled to buy US wheat, fearing Australian supplies will be weak.

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BA-Merrill Lynch believes the federal budget could provide headwinds to consumer spending. Initiatives such as the proposed debt levy, potential cuts to welfare, unwinding of the School Kids bonus and the Medicare co-payments could be as much as $9.4bn, representing 4% of total retail sales and 11% of discretionary retail sales. Merrills' economists are predicting that household disposable income growth in FY14 will be the lowest since 1998.

The broker notes Australian Bureau of Statistics' data shows an increasingly greater proportion of expenditure is allocated to necessities such education, utilities, health and insurance. Pressure on discretionary purchases will come at a poor time for retailers, the broker contends. These retailers will have to deal with a lower Australian dollar going into FY15 by raising prices. If consumer spending decelerates after the budget the ability to pass on price increases may be limited, which would impact gross margins.

As the "confessions season" nears, when companies are likely to tweak guidance for the upcoming financial year, BA-Merrill Lynch has taken a peak at where the earnings risk in FY15 could be coming from. The broker sees downside risk for the industrials ex banks. Consensus forecasts expect sales growth of 4.6% to translate to earnings growth of 11%. The broker notes margin expansion of this magnitude has not been seen for at least five years. Hence, Merrills suggests treating the forecasts for Adelaide Brighton ((ABC)), Sims Metal Management ((SGM)), Monadelphous ((MND)), UGL ((UGL)) and ALS ((ALQ)) with caution. The broker is more comfortable with the forecasts for Amcor ((AMC)), Brambles ((BXB)), Flight Centre ((FLT)) and Suncorp ((SUN)).

In terms of the current year the broker, in aggregate, is comfortable with forecasts. Stock specific risk is the main concern, along with a greater-than-usual reliance on second half sales. In the latter bracket the broker includes Ansell ((ANN)), Treasury Wine Estate ((TWE)), Cochlear ((COH)), Qantas ((QAN)), Virgin Australia ((VAH)), UGL and Southern Cross Media ((SXL)). On the other side of the equation those that could beat because of a lower reliance on the second half include Beach Energy ((BPT)), Brambles and Super Retail ((SUL)).

The broker also lists stocks for which earnings forecasts have fallen, but the share prices have risen over the past three months, as having potential to correct. These are Graincorp ((GNC)), Qantas, Caltex ((CTX)), AGL Energy ((AGK)), Mineral Resources ((MIN)), Harvey Norman ((HVN)) and Lend Lease ((LLC)). The opposite, where earnings have been upgraded but the share price has fallen, occurs with Bendigo & Adelaide Bank ((BEN)), ASX ((ASX)) and Perpetual ((PPT)). Merrills remains underweight in consumer staples and miners in the model portfolio, and considers banks, diversified financials and builders have solid momentum.

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JP Morgan has hosted a call with media buyers about the advertising market. The broker found the year was off to a strong start in TV, helped by the Winter Olympics and the World Cup. The buyers expect up front volumes to be up 2% this year and TV remains a crucial part of advertisers budgets. Live events, particularly sports, are seen as increasingly valuable. Advertisers are relying even more heavily on live events, as audience fragmentation continues. The broker suggests the premium difference between live sport and general programming could widen even further.

The buyers believe cinema is poised to gain share. Cinema's audience is stronger when TV is weaker – Friday and Saturday. The medium's high engagement through sight/sound and the lack of skipping ability underscores its attraction, as well as the skew to a younger demographic. The broker thinks the premium to TV has historically been a hurdle to advertisers but more aggressive pricing recently should unlock more demand.

There continues to be momentum in the move to digital. Advertisers are increasingly embracing digital video and the buyers noted significant improvements in both digital and cross-platform measurement, whereby advertisers can increasingly evaluate digital media on par with traditional media. While digital media is gaining share TV is still dominating. Even YouTube consumption significantly lags TV in terms of the hours watched per day. Viewing video on digital platforms, including mobile, is growing rapidly, but still only accounts for about 6-7% of total viewing.
 

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