Weekly Broker Wrap: SMSFs, Franking, Building Materials, Bank Capital, Wealth And Utilities

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-Self managed super growing strongly
-James Hardie constrained by Texas
-Boral supported by Oz infrastructure
-Revised Basel rules but uncertainty prevails
-Fund flow growth slows but still healthy
-Policy uncertainty a headwind for utilities
 

By Eva Brocklehurst

Self Managed Super Funds

Self Managed Super Funds, or “selfies”, have had a torrid time this year, Credit Suisse maintains. They are on track to record capital losses for the third quarter in a row. As a consequence, selfies as a proportion of the $2 trillion Australian pension pool are reducing.

While there were comparable dollar losses in the rest of the superannuation fund segment these were smaller as a proportion of total assets. Allocations to Australian equities by selfies have fallen to 39% of current portfolios from 41% a year ago.

Despite this fact, the broker notes they remain the most important pension investor in Australian equities, owning 16% of the market versus 11% for retail funds and 7.0% for industry funds. Importantly, selfies are growing in numbers as members roll over funds from other superannuation vehicles.

The broker observes this will continue as the country's pension scheme ages and selfies will underpin the dividend trade in Australia. They are committing more new money to Aussie equities than any other group and the segment is winning new members at the expense of the rest of superannuation industry.

Their second biggest asset is Australian cash at 27% of assets under management and the third is Australian property, at 25%. Credit Suisse estimates their property positions have increased by two percentage points over the past 12 months.

Franking

Macquarie has analysed its data and research on franking, comparing companies against sector peers and looking at franking credits as a percentage of market capitalisation. Fortescue Metals ((FMG)) has moved into the top five in terms of the highest franking credit balances while Commonwealth Bank ((CBA)) has fallen in rank, albeit still increasing its franking balance to $569m this year from $533m last year.

In the lowest value end of the scale, Village Roadshow ((VRL)) has moved into the bottom five while Aurizon ((AZJ)) has come out. Aurizon's franking balance has moved from negative to $76m.

Macquarie also notes Harvey Norman ((HVN)) continues to have a high franking account balance compared with other companies in the ASX100, although its balance has dropped in 2015 to $584m from $659m. Fairfax Media ((FXJ)) has a comparatively low franking balance which has gone backward since 2013 when compared with other stocks in the ASX100.

Building Materials

Credit Suisse has surveyed US real estate agents and notes their concerns around the shortage of quality homes amid buyer resistance to higher prices. Home buyers constrained by job security were sharply in evidence in Texas, while several markets noted a material slowing in foreign buyers, which has taken the heat out of the market.

The broker believes this warrants caution around the broader housing market as the slower winter months get under way. This could be aggravated by affordability issues following recent increases in mortgage rates.

Texas accounts for around 25% of James Hardie's ((JHX)) total US fibre cement volume and is also one of the company's more profitable regions. James Hardie is also is overweight in the city of Houston, where activity according to the survey fell to its lowest level since the global financial crisis.

Credit Suisse expects the stock to be range bound until the secular growth story is restored. The company is also further impaired by a capital management story that has largely played out.

The broker estimates 20-25% of Boral's ((BLD)) US revenue is derived from Texas, accounting for 2-3% of the group. Still, a number of catalysts should support the company's earnings, with the broker anticipating the emerging Australian east coast infrastructure cycle.

Bank Capital

The latest Basel revisions to bank capital rules appears to be softening relative to last December's proposal, Macquarie observes. Uncertainty surrounding implementation and interpretation continues but the broker suspects risk weighting on standardised mortgages is likely to be lower than previously expected.

The broker also observes that while banks took the opportunity to raise pricing on investor portfolios relative to the owner occupier part of their book, the capital backing for these exposures has not materially changed.

Assuming regional banks are able to continue to utilise the lender mortgage interest capital offsets, Macquarie considers the revisions are a better-than-expected outcome for the regional banks. The broker continues to envisage upside risk to bank valuations as the sector yield gap to the industrials narrows.

JP Morgan considers the revised proposals maintain the pressure on the major banks to progressively build capital over coming years. The broker observes some headwinds across the corporate and credit card book but the biggest unknown is with mortgages.

Significantly higher risk weights for investor mortgages should be a key swing factor that the broker believes is open to interpretation on the basis of whether loan servicing is materially dependent on rental income.

The broker envisages overall risk weights across the regional bank portfolios as unchanged, with higher investor risk weights offset by lower owner occupied risk weighs for higher loan-to-valuation ratio mortgages.

The risk weight floor for advanced accredited banks for investor mortgages still largely remains an academic exercise, in the broker’s view. JP Morgan works with an assumption of an 80% floor.

Wealth Manager Retail FUM

Statistics from the September quarter indicate that weaker markets are affecting investor appetite, although UBS observes net inflows to wealth manager retail funds remain at quite healthy levels.

Flows have now remained at around $20bn for nearly two years and, as a consequence, growth from flows into funds under management (FUM) has declined to 3.1% from 3.8% over this period.

This level of flow was not sufficient to offset the impact of equity market declines, which reduced FUM by 2.0% in the quarter. While not the best quarter for AMP ((AMP)) the stock remains the broker's preference as a defensive wealth manager, versus pure-play fund managers such as BT Asset Management ((BTT)), as it is considered to have more leverage to reduced investor flows and markets.

Utilities

Morgan Stanley believes the climate agreement in Paris has a low immediate impact on Australian utilities because the agreement was well flagged by the US and Chinese delegations, and because implementation in Australia will only follow in 2020.

The broker expects Australia's emissions reduction will require an evolving of the government Renewable Energy Target (to be reviewed in 2020) and its Direct Action plan. In the meantime, uncertainty in emissions reduction policy will be a sector headwind, in Morgan Stanley's view, as it hampers capex planning for the utilities under coverage. This contributes to a Cautious industry view.

DUET's ((DUE)) Energy Developments business is a beneficiary because its revenue and development prospects rely, in part, on emissions reduction policies. The broker's base case is a modest carbon price from the early 2020's, continued deployment of both large and small scale renewables and an orderly shift in the mix of coal-to-gas-to-renewables in thermal generation and oil-to-electricity in transportation.
 

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