Weekly Broker Wrap: Oil Price, Property, Aust Dollar And Wagering

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-Reduced demand for coal, gas?
-Authorities target property investors
-Aust dollar weakness likely preferred
-State, industry racing revenue broadens
 

By Eva Brocklehurst

What does a lower oil price mean for Australia? It is positive for household spending and Commonwealth Bank analysts calculate the fall of 20% since mid year equates to a lift of around 0.2% in household income. IMF calculations suggest that a 10% fall in the oil price equates to an increase in global GDP growth of around 0.2%. The current downtrend is not just about higher supply but also weaker demand. The supply-side shock is occurring as US output lifts from non-conventional sources. Supply has also surprised on the upside from countries such as Libya. On the demand side, there are indications growth from India and China will be lower than expected over the coming year.

For Australian households, secondary effects could occur as lower transport costs are passed on. Discretionary retail, where price elasticity is high, is usually a major beneficiary of a fall in petrol prices. The analysts point out a lower oil price has dampened inflation expectations and bond yields, and is already showing up in the inflation data. From a national perspective, lower oil prices will decrease demand for other substitute energy sources, namely coal and gas. This could result in a trade shock with some rough calculations suggesting a 20% fall in oil prices equates to a terms of trade reduction worth around 0.4% of nominal GDP.

There will be some offsets. Fuel makes up a considerable proportion of business costs and the industries with the highest consumption are transport, manufacturing and electricity. These will likely benefit. The choice of improving margins and profitability or passing on lower costs will come down to the competitive pressures, in the analysts' view.

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Domestic housing-linked stocks have been affected by concerns about macro prudential policies being tightened and a resultant pullback in housing approvals. Morgan Stanley is not overly worried, as the relevant authorities, the Reserve Bank of Australia and Australian Prudential Regulation Authority, will likely be scrutinising investors in established property. The broker anticipates higher serviceability buffers and capital requirements such as risk weights or capital ratios are most likely.

The RBA has described the housing market as becoming unbalanced but its concerns lie specifically with investors in established housing in Sydney and Melbourne and inner city apartments in Melbourne. Morgan Stanley observes Australia is along way from an oversupply in housing while a sustained construction cycle is helpful in boosting supply. Hence, the broker envisages building stocks can still outperform, even as more difficult comparables are cycled.

AllianceBernstein still believes the fundamentals are supporting capital markets even as investors express concern that valuations are stretched. The analysts observe that markets have been expensive before, even for lengthy periods, without enduring a calamity. Ordinarily, the analysts note, the Australian dollar would act as a shock absorber and fall to offset some of the income squeeze coming from lower iron ore and coal prices. As yet, the falls have only been modest relative to the slide in commodity prices and this is proving to be a headache for the central bank.

AllianceBernstein notes momentary easing was initially intended to boost the housing sector through construction activity but also resulted in a surge in lending to investors and in doing so may have been too successful. This highlights the potential for some form of policy restraint on the sector.

CIBC observes, despite attempts by the RBA to maintain a stable bias in rates, markets are pricing in easier policy amid uncertainties in the real economy and commodity market weakness. This points to underperformance by the Australian dollar. The analysts suspect the RBA may well prove to be another central bank that encourages a bout of currency weakness to counteract less-than-encouraging trends. The RBA would prefer conditions ease via the currency than via interest rates, as household debt levels remain high. The analysts acknowledge the currency does look rich when compared with other similarly based valuations and expect the Australian dollar to fall to US82c in the coming year.

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Investor updates from the likes of Tabcorp ((TAH)), Paddy Power and William Hill suggest to Credit Suisse that wagering industry growth is being stimulated by smartphone technology, led by the Europeans. Still, regulatory change could level the field and enable all three operators to grow revenue. The broker observes Paddy Power and William Hill are over-indexed to market growth drivers of mobile, fixed odds and sports betting and their high gross profit margins, unburdened by state taxes, allow them to spend more in terms of marketing their product.

Meanwhile, Australian racing industry regulators have shown a willingness to devise new fee arrangements that selectively tax corporate bookmaker products and favour incumbent tote operators. There are potential headwinds as the industry and governments seek to broaden revenue sources away from lower growth totes.
 

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