The Wrap: Wage Slowdown, Market Correction

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Real wage growth could turn negative; a correction in the stock market; healthcare’s permanent changes driven by the pandemic; and retail spending is expected to fall by 2020-end.

– Australia’s nominal wage growth expected to slow  
– Markets may be in for another round of correction
– Covid-19-led changes to healthcare involve more remote patient monitoring
– Retail spending is expected to fall in the quarter to December

By Angelique Thakur

Real wage growth may turn negative

ANZ Bank’s research team forecasts Australia’s nominal wage growth will slow down to 0.7% year-on-year (yoy) in the first half of 2021 from 2.1% (yoy) in the first quarter of 2020.

This forecast is underpinned by two developments. The first is an increase in underemployment, which has soared to more than 20%. More worrying is the unemployment rate, kept low artificially by JobKeeper.

ANZ expects it to be a long time before under-utilisation falls back to pre-pandemic levels, while unemployment is expected to reach 7.5% by the fourth quarter and remain high well into 2021.

The second development is an increase of 1.75% in the minimum wage by the Fair Work Commission on June 19. This will lead to an additional $13/week for full-time workers. The analysts note this is the smallest increase since the mid-1990s (except for the post-GFC freeze).

Also, as opposed to the usual date of July 1 for the new wages to come into force, it has been deferred for some workers till November 2020 (construction and manufacturing) and even till February 2021 (accommodation, aviation, retail and tourism). The analysts highlight some of the deferred sectors have been hit the hardest by the pandemic.

Nominal wage growth is predicted to improve to 1.2% (yoy) by mid-2022.

After adjusting for inflation, ANZ expects real wage growth could turn negative this year, continuing into 2021. This will reduce the living standards and purchasing power of households.

The fall in wage growth was also seen during the GFC with the US wage growth slowing to 1.4% (yoy) while New Zealand hit 1.5% (yoy). It took several years for wages to show any material improvement while Australia recovered quite quickly.

Right now, Australian wage growth is slower than the US or New Zealand and might even reduce to almost zero in some quarters, ANZ warns, while admitting to a lot of uncertainty around these forecasts and acknowledging an estimated 0.7% has upside risk.

Correction in the offing

Macquarie analysts anticipate a correction in equity markets and give three arguments to support their view.

Firstly, the analysts point towards rising covid-19 cases along with a second wave of shutdowns in some parts of the world. If this continues, the S&P 500 might undergo a -6-7% correction, which in turn will lead to a correction in the ASX.

The second reason is the shrinking Fed balance sheet led by reductions in repo and swaps. Since liquidity injected by the Fed has been crucial for equities, a continued contraction may add to the risk of a correction.

Here, the analysts highlight purchasing corporate bonds could offset the impact emanating from unwinding of the remaining repos and swaps.

Lastly, the analysts point out the forward price-earnings (PE) ratio for the ASX 200 is 19.3x, which is 3% above its pre-pandemic high. Such high valuations render the market vulnerable to negative surprises.

Offsetting all of the above, somewhat, may be improving earnings, with net earnings downgrades down to 15% on June 22 from nearly 80% on April 22. Macquarie analysts expect net revisions to continue to improve and be positive in August.

Macquarie prefers a defensive portfolio with exposure to commodities and resources over industrials. Stocks which have above-consensus earnings estimates and are rated Outperform include Rio Tinto ((RIO)), OZ Minerals ((OZL)), Oil Search ((OSH)), Santos ((STO)) and James Hardie Industries ((JHX)).

The new normal in healthcare

Covid-19 has changed our lives in many ways and while the pandemic itself may be temporary (hopefully), some of the changes it has prompted are expected to be far more enduring. The healthcare sector has experienced a shift in practices that Morgan Stanley feels may be permanent.

The government introduced new Telehealth codes for GP attendance which now make up about 35% of current consultations. Retaining this could increase convenience for patients and cost savings for both patients and medical centre operators. GP supply constraints could also ease up.

Morgan Stanley analysts estimate the total addressable market (TAM) for GP consultations to be about $6.5bn (in the 12 months to March) of which Telehealth could constitute $2.8bn.

Sonic Healthcare ((SHL)) and Healius ((HLS)), with a notable share of the GP attendance market, will benefit in terms of cost savings.

The Australian Health Ministry is currently assessing options pertaining to retaining Telehealth codes beyond September 30, 2020.

Cochlear’s ((COH)) Remote Check is an in-home testing tool which enables recipients to complete hearing tests. These tests are then sent to their clinician remotely for review. This solution was approved by the US FDA as a response to covid-19.

Since Cochlear is the only company offering this tool, Morgan Stanley expects this will drive market share gains and provide upside to earnings forecasts and price target.

The third shift, seen in April, relates to the US Centres for Medicare and Medicaid Services (CMS) releasing some reimbursement changes to increase access to remote care and remote patient monitoring. This was done to avoid exposure to covid-19. Morgan Stanley believes this will accelerate adoption of ResMed’s ((RMD)) Propeller Health.

Propeller Health is a digital health platform for managing asthma and chronic obstructive pulmonary disease (COPD) by tracking medication usage by patients and providing patient information to clinicians to optimize treatment.

The analysts expect more people to adopt this tool, boosted by US Medicare’s recent reimbursement changes and consider the company well positioned to benefit from sector growth.

Morgan Stanley estimates a 10% capture of the market will drive earnings upwards by around 3-4%.  As a result of this sector research update, ResMed’s rating was upgraded to Overweight.

Regional Banks: A potential consolidation road map

Even excluding the impact of covid-19, regional banks continue to face challenging conditions due to their lack of scale. Bell Potter analysts believe the creation of a super-regional bank may make things easier. They advocate the merger of Bendigo & Adelaide Bank ((BEN)) with Suncorp Bank ((SUN)).

However, Suncorp Group wishes to retain its bank for the time being, prompting the analysts to look for another viable option. They point towards ME Bank and its merger with either Bendigo & Adelaide or Bank of Queensland ((BOQ)).

ME Bank was founded in 1994 by Australia’s superannuation funds industry. While it was founded to offer home loan products, it is a full-fledged bank today.

Due to its narrow focus, ME Bank’s growth profile and asset quality mirror those of smaller regional banks like Auswide Bank ((ABA)) and MyState Bank ((MYS)).

The bank’s industry fund ownership provides a stable source of funding — its key strength according to Bell Potter analysts, although this is somewhat marred by a lower net interest margin (NIM).

In terms of cost to income ratio, Bell potter notes ME Bank is at par with the larger regionals and ahead of Auswide and MyState.

The acquisition of ME bank by either Bendigo & Adelaide or Bank of Queensland will provide scale along with benefits like better credit rating and cost synergies. Bell Potter also expects the deal to be accretive in terms of earnings and return on equity.

The acquisition will benefit Bendigo & Adelaide more, given similarities in culture and operations.

Bell Potter analysts are bullish on Suncorp while maintaining a Hold rating for Bendigo & Adelaide Bank and Bank of Queensland.

Australian Retail: Artificially propped up

Retail sales were up 5% in May (yoy), as per ABS data, driven by at-home food retail and household goods. This is a jump from April which saw sales falling by -9% (yoy).

Citi analysts feel the current growth stems from the combined impact of factors like limited spending options outside retail along with government assistance. This is further supplemented by superannuation withdrawals with May recording -$12bn of super paid out to 1.6m members. Mortgage holidays have also boosted spending.

These factors are unlikely to persist, , and thus Citi expects retail spending to fall in the December quarter. Discretionary retail sales are expected to fall by -1-4%, even with stimulus measures amounting to $15-20bn.

Citi analysts are cautious about City Chic ((CCX)), Lovisa Holdings ((LOV)) and Wesfarmers ((WES)) due to elevated PE ratios.

AREITs: Distribution guidance throws light on operations

As most A-REITs had withdrawn guidance for the first half, Morgan Stanley analysts were keenly awaiting the June-half distribution forecasts.

Dividend forecasts by retail REITs like Shopping Centres Australasia Property Group ((SCP)) and Charter Hall Retail ((CQR)) point towards specialty tenant rent collection of only 30-50% for March- June. The analysts note rent collection may only be just starting, with rent relief measures being discussed.

A look at distribution estimates by Mirvac Group ((MGR)) and Stockland ((SGP)) implies both have lowered their payout ratios. The analysts think the two could be withholding some of their Trust earnings (used to pay dividends).

Morgan Stanley also highlights some companies may consider uncollected rent as revenue, implying there might be a huge difference between a company’s reported earnings and cash actually received.

All REITs are funding distribution from cash rather than earnings, point out the analysts.

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