In Brief: House Prices, Food Crisis, Packaging

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Weekly Broker Wrap: house price decline begins, geopolitical tensions spark food crisis, Australian packaging producers underinvest in capital. 

-Anticipated house price declines begin, experts predict a -15% drop ahead
-Food insecurity looks to increase as geopolitical tension impacts food imports
-Capital expenditure underinvestment by Australian food packaging could lead to competitive disadvantage

By Danielle Austin

House prices decline, soft building approvals suggest risk to construction industry

The -0.3% decline in national house prices in May looks to be just the start of house price declines according to analysts from Morgan Stanley, who predict prices may fall by a further -15% over the next eighteen months. It marks the first decline in house prices since September 2020, and while prices remain 11.7% higher than they were a year ago it is the view of the Morgan Stanley analysts that it is no coincidence the first decline in national house pricing in more than two years has coincided with the first cash rate hike in more than a decade.

Morgan Stanley predicts the cash rate will rise to 1.75% by December, noting imminent rate hikes will have a direct impact on loan serviceability costs and warning investors to expect a -5% decline in house pricing in 2023 and a further -10% decline in 2024.

Declining house prices could also indicate further risk for the construction industry according to the broker. Noting forward building approvals have softened significantly, down -2.4% month-on-month and -32% year-on-year in April, Morgan Stanley anticipates approvals will decline further as house prices fall. While around 230,000 construction projects remained in the national pipeline at the end of 2021, Morgan Stanley highlighted risk around the completion of these projects as costs increase and prices decline, with risk to construction activity translating to risk to the 9% of the workforce directly employed by the industry.

Food import constraints could drive global food crisis

With constraints on global food exports, analysts at ANZ Bank are anticipating food protectionism to increase and food insecurity to worsen, driving a global food crisis that will be detrimental to the United Nation’s goal of zero hunger by 2030.

According to ANZ, the Russia-Ukraine conflict is a major driver of an ongoing global food crisis. Grain exports in particular look to be a challenge, with both Russia and Ukraine major grain exporters having supplied 30% of global wheat supply in recent years. Coinciding with a series of poor grain harvests, particularly in North and South America, inventories of the soft commodity are precarious. With the conflict impacting energy and fertiliser availability, ANZ anticipates another challenging grain harvest ahead.

With global grain inventories set to shrink to the lowest level since 2016 this year, ANZ noted China hold nearly 58% of global grain stocks in a bid to protect itself against food insecurity, and will serve the country well as other nations look to import product at inflated prices. Africa, where the World Food Program estimates up to 20 million people are facing sever hunger, is highly dependent on food imports, and more vulnerable to food inflation and a global food crisis. The broker noted other developing countries are also exposed to food inflation, and with the FAO Food Index surging to a new record level the United Nations anticipates 660 million people will face hunger in 2030 due to lasting impacts of the covid pandemic.

For investors, it worth noting food exporting nations like Australia and New Zealand may continue to benefit from elevated soft commodity pricing, in a net sense.

Australian packaging companies lag peers on capital expenditure investment

Analysts from Jarden have warned investors to consider the impact to free cash flow and valuations of Australian packaging companies should they need to lift their capital expenditure investment near-term. Market analysis from Jarden suggests Australian packaging companies are underinvesting in capital expenditure compared to their US counterparts, which could leave them at a competitive disadvantage over time according to the broker.

While Jarden’s analysts noted capital investment has been at a cyclical low for Australian packaging between FY17-22, their US peers have increased reinvestment in the same period. Further, they highlighted the high reliance on fixed capital productivity and capacity of the packaging industry, with domestic companies now utilising older technologies and less productive assets with shorter remaining lives.

Of the relevant packaging companies in their coverage, Jarden noted consensus expectations are that both Amcor ((AMC)) and Orora ((ORA)) capital investment will remain low in relation to US companies over the next three years, meaning an increase in expenditure above current guidance could see cashflow differ significantly from market estimates. If increased capital investment is assumed, marking likely spend to US peers, Amcor ((AMC)) offered the greatest upside to forecasts, followed by Orora ((ORA)) and Pact Group ((PGH)).

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