Weekly Reports | Aug 31 2018
Weekly Broker Wrap: banks; Australian gas; inflation; Australian elections; and housing.
-Westpac opens the way for major banks to re-price mortgages
-LNG prices expected to head higher on the approach to Christmas
-Inflation may be peaking as growth pace is ebbing
-Australian market deliver stronger returns a change in government
-UBS suspects RBA, APRA unwilling to reflate house prices
By Eva Brocklehurst
Banks
Westpac has lifted standard variable rates on all housing loans by 14 basis points following weak margin outcomes in the third quarter, amid higher funding costs and slowing credit growth. This shows that the bank is still prepared to use its pricing power, despite the increased scrutiny of conduct and competition, Morgan Stanley notes. The broker lifts major bank earnings estimates by 2%.
Morgan Stanley had formed the view that pricing power had peaked, rather than come to an end, and that the major banks would find it difficult to re-price in the near term, given the scrutiny.
The broker believes the decision by Westpac opens way for the other major banks to re-price mortgages although they may raise rates by a smaller amount than Westpac, which had previously raised its rates less than peers.
Macquarie also expects other major banks will follow Westpac's lead yet agrees they may do so by a lesser amount while competition is still tense. The broker expects the initiative will prove a welcome earnings reprieve across the banking sector. Macquarie suggests the greatest upside for Westpac from this move will be if BBSW-OIS spreads normalise over time.
Australian Gas
Credit Suisse suggests the seasonal uptick in Asian LNG demand, aggravated by delays and dwindling supply, should mean prices go up for domestic gas in the approach to Christmas.
The ACCC is soon due to report an LNG net-back price, which the broker suspects will show prices are increasing. This will create trouble for government narrative regarding decreasing prices in response to policy.
The broker suggests a drop-off in North West Shelf supply and natural field decline will mean the market tightens over the next decade. If no new domestic gas supplies are developed soon buyers will be solely reliant on a major LNG player over the next decade.
Credit Suisse also expects tough political rhetoric will increase against the gas exporting industry heading into the election, exacerbated by rising prices. While the limits on exports should not be triggered, policy is being made on the fly and the uncertainty regarding election timing means nothing can be ruled out.
There is a high risk that the government pressures exporters to reach accommodation with those gas buyers that are particularly at risk, such as those in particular electorate or with unionised workforces.
A tougher line on retention lease renewals is not expected to help the east coast but may aid development of gas resources of the west coast, in the broker's view. Credit Suisse suggests industrial buyers looking for gas at $7/GJ are going to be lucky to pay $10/GJ next year.
Inflation
Credit Suisse suspects inflation is peaking as growth is not running at a strong pace. Moreover, while the Reserve Bank officials are confident inflation will return to target and support rate increases, there is evidence soft retail sales growth, subdued confidence and fading capital expenditure intentions are causing growth to slip to around 1.5% annualised.
The broker suggests the output gap is likely to widen further and usher in disinflation. Modelling also suggests a weaker AUD/USD has not been a sufficient reflationary offset to the weakness in emerging markets.
The prospect that inflation undershoots expectations makes the broker confident regarding curve flattening and the inversion of the Australian/US yield differentials. In this environment, Credit Suisse favours high-quality industrials over banks, domestic cyclical is and resources.
Australian Elections
Historically, the Australian market typically has stronger returns in the months following an election, Macquarie observes. Returns are strongest when there is a change in government as the market adjusts policy expectations.
The trends are less pronounced when an incumbent government is re-elected as this is less likely to lead to significant changes in policy or direction. The Australian market has also underperformed global markets on average in the months leading up to a change in government, which may be associated with higher uncertainty prior to an election.
Housing
Over the last 30 years the cash rate from the Reserve Bank has structurally declined to a record low of 1.5% from a high of around 18%. Over this period, whenever housing weakened, the central bank was willing and able to ease policy to reflate the market.
These changes, historically, drove cycles in home loans and prices. UBS observes this time it is different. The current housing downturn is unique in that it is not preceded by higher rates that have crimped demand, and now mostly reflects a reduction in credit supply.
The broker suspects both the RBA and the Australian Prudential Regulatory Authority (APRA) have little willingness to reflate housing. Hence, UBS expects a cumulative -20% drop in home loans and home prices to fall -5% or more.
So far the drop in house prices is historically small but, given the likely lack of policy responses, prices are probably going to keep falling in 2019 and ensure the longest downturn in decades.
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