Weekly Reports | Mar 31 2017
This story features ADBRI LIMITED.
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Weekly Broker Wrap: Mortgage re-pricing; China and Australia's housing market; Australian dollar outlook; IVF data in February.
-Re-pricing of mortgages a short-term positive for the banking sector
-Severity of housing downturn to be cushioned by Chinese demand
-Australian dollar expected to head lower, affected by US rate hikes, tax cuts
-RBA unlikely to be in a position to hike rates before the end of 2018
By Eva Brocklehurst
Australian Banks
Macquarie estimates the recent round of repricing initiatives by the major banks has boosted earnings by around 3%. In the short term, the broker believes the ongoing ability to reprice and maintain earnings growth is a positive for the sector.
Additional pressure on the household sector is expected to ultimately have adverse implications on credit quality and hence, Macquarie believes the ability to continue to reprice is diminishing. Coupled with the rising global rates outlook, this suggests to the broker risks around investor portfolios are increasing.
Based on forecasts, Macquarie estimates the flow from off-the-plan settlements alone will underpin 5-6% of investor lending volume growth until the middle of 2018. The broker's forecasts for investor growth, running at 7-9% over 2017 and 2018, are based on domestic investors representing around 35% of new purchases.
Should this figure increase towards 50% it could result in the system level of investor growth going above the regulator's 10%. Such a scenario is expected to have an adverse impact on bank development books and, subsequently, on investor lending portfolios.
Citi notes the repricing initiatives have concentrated on interest-only loans, which make up around 40% of total mortgage portfolios. While at face value the repricing is expected to have a positive effect on bank earnings, around 3-4% on average, this is likely to be tempered by competitive market dynamics, the broker suggests. Citi maintains a cautious view on the sector and, with lending growth expected to slow, believes revenue growth from higher prices is required to deliver improved results.
China And Housing
Sydney's house prices have more than doubled since 2009 while Melbourne prices are up 90%. Credit Suisse observes residential real estate in Australia's two largest cities now rank as the second and sixth most expensive in the Western world. It remains clear that housing demand is outstripping supply and the marginal buyer of Australian housing continues to be coming from China.
The broker calculates foreigners are currently buying the equivalent to 25% of new supply in NSW and 16% in Victoria. Almost 80% of foreign demand is from China and Chinese buyers continue to settle on their purchases despite numerous impediments. Credit Suisse expects Chinese demand for Australian housing to grow, supported by wealth creation, attractive valuations and closer economic integration.
While Australian housing is at a peak in its cycle the broker believes the pace and severity of the coming downturn will be cushioned by Chinese demand. Many housing-exposed stocks are now priced for a sharp slowdown and the broker believes this is too cautious. Credit Suisse adds Adelaide Brighton ((ABC)) to its long portfolio and removes Caltex ((CTX)).
Australian Dollar
Henderson Global Investors suspects the current peak in Australia's terms of trade is likely around mid 2017, as higher commodity prices bring on more supply and eventually lead to some retracement in prices. Apart from commodity supply, leading indicators also point to a slowing in the pace of global expansion over the second half of the year.
The other impact on the Australian dollar is the prospect of two further rate increases from the US Federal Reserve this year and another three in 2018, taking the Fed Funds rate to 2.1% by the end of 2018. In contrast, Henderson expects the Reserve Bank of Australia to keep the cash rate steady at 1.5% over 2017, with the balance of risks tilted towards further easing as the housing construction cycle matures later this year.
The analysts forecast the Australian dollar to fall to US70c by the end of 2017 on a combination of easing commodity prices and slower global growth, as well as an narrowing in the cash rate differential between the US and Australia. The terms of trade are expected to move sideways through 2018.
The Australian dollar is then expected to rise to US75c by the end of 2018 as the market starts to factor in the start of a tightening cycle by the RBA. The analysts do not expect the RBA to be in a position to tighten before late 2018 given the inflation outlook.
Commonwealth Bank analysts anticipate the Australian dollar will edge down to US69c by the first quarter of 2018, driven almost entirely by strength in the US dollar. The US dollar is expected to be supported by the Fed lifting its interest rates, as all other major central banks are either easing or holding their official interest rates steady.
The main determinant for the US dollar is what the Trump administration does with the US company tax rate. If a simple cut in the rate to 15% from 35% is delivered it will be bullish for the US dollar for two reasons. First, the analysts contend, it will lift the US equity market and generate capital flows into the US economy. Second, this will cause a large repatriation of US multinational profits, in turn strengthening the US dollar.
If the House Republicans' favoured border adjustment tax package is delivered, the analysts suspect the disruptive effects of the tax package could cause the US Fed to delay raising rates and the US dollar will then decline.
On the Australian home front iron ore prices are expected to ease in the remainder of 2017, which is expected to weigh on the Australian dollar as the lift in the terms of trade recedes. The analysts expect iron ore supply to expand this year, as committed supply hits the seaborne market and China's domestic supply responds to higher prices. Iron ore prices are expected to fall to US$60/t by the end of the year.
The CBA analysts base case for Australia's cash rate is for policy to remain on hold throughout 2017 and well into 2018. The analysts believe the bulk of the drag from mining investment is almost over and the housing market activity is buoyant. Nevertheless, the central bank is not expected to be in a rush to raise rates soon.
Australia's high under-employment rate and weak wages growth suggests there is spare capacity in the labour market. Moreover, underlying CPI inflation remains benign at 1.55%, which is generating support for the Australian dollar via real interest rate differentials.
IVF Monitor
IVF industry growth rebounded in February, up 9.7%. Geographically, Queensland was the strongest performer recording total cycle growth of 31.7%.
UBS suspects it likely that Primary Health Care's ((PRY)) new bulk-bill clinic in Brisbane has begun to affect state volumes. The broker also notes that Virtus Health ((VRT)) has commenced its transition to “bulk bill plus” from “lower cost” at its TFC facility in Brisbane. Despite the rebound, the broker expects a contraction of -3.0% in Virtus Health's domestic cycle growth in the second half.
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