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In Brief: Risks From Russia, House Prices And Insurance Brokers

Australia | Feb 04 2022

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Weekly Broker Wrap, In Brief: Eastern Europe tension spikes inflation fears, house prices decline ahead, insurance brokers to benefit from commercial rate cycle. 

-Russia-Ukraine tensions driving fear for further energy price inflation
-Cash rate increases later in the year could drive a decline in house pricing 
-Current rate cycle momentum continues to benefit insurance broker growth 

By Danielle Austin 

Threat of Russia’s Ukraine invasion causing market volatility

With experts anticipating high global inflation in the coming year, a continuation of Russia-Ukraine tensions could add further pressure given Russia’s central role to Europe’s energy supply.

Heightened market volatility is expected as long as the dispute remains headline news. The geo-political tensions in Eastern Europe are driving concern for not only local energy markets, but for flow-on economic impacts.

Given market volatility and the potential impacts of not only European tensions, but also the rising spread of the omicron variant, analysts at Amundi point out Central Banks already appear alert and ready to respond to market movement. A rapid acceleration in inflation momentum may drive Central Banks to issue cash rate increases in a bid to slow inflation.

Given Europe’s stark gap between gas demand and supply following a strong decarbonisation commitment in recent years, energy prices are already elevated and the risk of gas flow disruption from Russia would see a significant increase in prices. Energy-heavy industries, particularly in Europe, are the most at-risk from potential price spikes as elevated pricing would put pressure on profit margins. 

Amundi has advised that a well diversified portfolio should benefit investors given uncertainty over the impacts of the current political tension, with commodity exporters making up around two-thirds of Russia’s market.

Interference attempts by NATO and the US could push the Russia-Ukraine situation down a number of different paths, and while the threat of sanctions hangs over Russia, the country is nowadays better positioned to weather sanctions given a financial buffer.

Oxford Economics analysts note tensions are likely to impact on the Russian ruble. While they find a Russian invasion into the Ukraine unlikely, the analysts have highlighted that further incursion into Ukraine beyond currently disputed areas would likely result in a devaluation of the ruble that could extend beyond levels reached during the country’s financial crisis in 2015.

Oxford Economics also expects it’s unlikely that gas flow from Russia will stop completely, with a total cut-off not in the country’s best interests. 

House prices peak ahead of cash rate upswing

Early indications suggest the housing market may have peaked in January, with the expected cash rate increase later in the year likely to drive down pricing. National house price growth in January tracked up 21.3% year-on-year and a more modest 0.8% month-on-month.

Morgan Stanley notes decelerated price momentum and lower clearance rates suggest a softening in the housing market.

While signs of a turn in the cycle are evident now, Morgan Stanley expects cash rate increases to trigger a more defined cycle change in the second half of the year. The broker expects a stabilisation of pricing over the first half as pricing growth slows but anticipates house prices to decline -5% by the end of the year, with cash rate increases driving the downward trend. 

Positive outlook for Australia’s largest insurance brokers

Australian insurance brokers look set for solid organic growth against a backdrop of positive commercial rate momentum persisting into FY22. Having sustained a five-year rate upswing, the rate cycle may now be considered later stage but there is still some confidence in further rate momentum.

Volumes for insurance brokers look to persist, with Credit Suisse highlighting that new company registration growth in the first half of FY22 was higher than the previous comparable period. Further, it was noted that periods of inflation tend to benefit broker earnings as businesses look to protect themselves against increased exposure. 

Recently initiating coverage on two of Australia’s largest insurance brokers, Steadfast Group ((SDF)) and AUB Group ((AUB)), Jarden noted an ongoing supportive premium rate cycle has, and will continue to, benefit earnings growth in the sector. 

Jarden assumes margin tailwinds and greater penetration of its Steadfast Client Trading Platform can drive 13% earnings per share growth for Steadfast Group in FY22, and a 6% compound annual growth rate for the following two years.

Benefit from the Client Trading Platform has been stalled by a slower roll out, but offers considerable potential once better utilised and is on track to achieve $1bn of FY22 gross written premium. Further, given platform commission rates, every 10% penetration uplift has potential to offer a $7m earnings benefit. 

The broker expects Steadfast Group to deliver 15.2% projected return, and could offer investors further upside risk through acquisitions. Credit Suisse also updated on the sector recently and retains an Outperform rating on Steadfast Group with a target price of $5.30, while Jarden initiates with an Overweight rating with a target price of $5.20. 

Consolidation looks vital to AUB Group’s outlook according to Jarden, which noted as AUB Group undertakes a considerable consolation of its more than one hundred businesses margins have already shown improvement.

The company is targeting a reduction of its footprint to less than thirty businesses and Jarden expects this to translate to a 3% margin expansion through to FY24, with AUB Group’s Australian Broking Earnings margin moving closer to 32%. 

Unlike Steadfast Group, acquisition does not appear key for AUB Group’s earnings per share growth, and the broker anticipates a projected return of 14.5%. Credit Suisse retains an Outperform rating on AUB Group with a target price of $25.70, while Jarden initiates with an Overweight rating with a target price of $25.90.

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