In Brief: Inflation, Cyber Security, Dividends

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Weekly broker wrap: inflation slowing ahead, cyber security cost, slow dividend growth. 

-Inflation looks to slow in the coming year as supply-side issues unwind
-Cost of cyber security breaches may be longer-term than expected
-Lack of diversification in mining sector drives poor dividend growth in Australia

 By Danielle Austin

Supply-side movements expected to be a driver of inflation decline 

Oxford Economics is anticipating a rapid decline in food and energy inflation, given recent movement in commodity pricing, but uncertainty remains around how quickly inflation will decline over the coming year.

It expects supply-side development will drive down core inflation, with factors including easing bottlenecks, inventory unwinds and lower commodity prices all working to reduce pipeline price pressures. 

Despite this, the Oxford Economics analysts do not expect supply-side problems to completely resolve in the coming year, with geopolitical uncertainty in China and Russia remaining a risk. Further, geographies where demand-side factors have played a larger role in inflation, such as in the US, are likely to experience a more gradual easing of core inflation. 

On analysis of other global economic downturns, Oxford Economics expects the peak to trough fall in global growth to be substantially smaller than that experienced in the 2008 Global Financial Crisis. But core inflation is markedly higher than it was in 2008, and would need to fall more sharply for headline inflation to decline substantially below target. It's still far from clear what rate of inflation policymakers will need to see before they are prepared to pivot on policy.

Cyber security breaches pose risk to companies and investors 

Recent data breaches at Optus and Medibank Private ((MPL)) have put a spotlight on the risk inadequate cyber security poses to companies and investors. 

If a company is a victim of a data breach, Jarden reports costs stretch as far as resolution with customers, the cost of ransoms and regulator fines, and customer attrition through market share losses. 

Further, impacts are not only near-term. According to Jarden, while companies typically take an initial -1-4% short-term price hit following cyber incidents, data suggests a longer-term -6% price hit impact to be evident one year later, particularly in the case of large-scale data breaches. 

With cyber security risk increasing, the broker posits sectors collecting large amounts of sensitive data are most exposed to data breach related cyber security risk. Jarden names airlines, banks, general insurers, healthcare, health insurers, telcos and utility companies as most at risk. The broker warns all companies should invest in strong data management to mitigate risk.

Despite market concerns that the security spending cycle has passed its peak, Morgan Stanley expects tailwinds to sustain security spending growth for a number of years. Among these tailwinds, increasing compliance and regulatory mandates, including from insurance requirements and newly imposed legislation, ensures industry commitment to security spend. 

Morgan Stanley also expects an expanding attack surface area driven by increasing digital connectivity and the rising cost of data breaches keeping security at the forefront for companies to sustain growth. The broker expects these tailwinds to see security spend exceed current IT budgets.

Australian dividends underperform as mining sector takes a hit

Janus Henderson has found Australian dividends have underperformed global peers, falling to US$28.6m in the third quarter of 2022 from US$36.3m in the second quarter. This represents a -13% decline in underlying payouts in the quarter, and a -21.3% decline in total payments year-on-year. 

According to the broker a global decline in mining dividends was a major contributor to the domestic decline, with an underlying lack of diversification driving weaker results. Fortescue Metals ((FMG)) was the biggest single driver, given its significant exposure to lower metal prices. 

More positively, Australian dividends did benefit from improving trading conditions for the banking sector amid ongoing rate rises. The banking sector made the biggest contribution to dividend growth as payouts grew 5.8% on an underlying basis.

Globally, an encouraging third quarter has seen Janus Henderson lift its headline dividend growth assumption to 8.2% for the year ,with underlying growth of 8.9%. The broker noted the quarter highlighted “the impact of heightened volatility and the commodity cycle across global markets.” 

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