Weekly Reports | May 05 2023
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House prices may retest lows, waiting for the slowdown in retail sales, bank’s commercial real estate exposure and US gaming.
-Morgan Stanley expects house prices will retest lows
-Will the expected slowdown in retail sales arrive?
-Australian banks’ exposure to commercial real estate
-US gamers generate a disproportionate share of global revenue
By Mark Woodruff (with a contribution by Sarah Mills)
Morgan Stanley expects house prices will retest lows
While recent data has suggested the worst of the house price downturn may be over, Jarden adopted a cautious tone, even prior to Tuesday’s cash rate increase by the Reserve Bank.
Also in advance of the monetary tightening, Morgan Stanley issued research suggesting house price lows will be retested. This view was based on the broker's forecast for a further 50bps of tightening.
House prices in Australia rose by 0.5% in April after a 0.6% rise in March, with Sydney leading the way with a gain of 3% since January.
A constrained supply environment continues to provide some price support, in Morgan Stanley’s opinion.
This broker noted the interest rate pause last month provided some sentiment support, with surveyed house price expectations up sharply in April.
National auction clearance rates held at an above average 65% for the third month in a row, observed Jarden, while surveys show a massive 43% increase in consumer house price expectations since November last year.
As a result, Jarden raised its 2023 forecasts for house price growth to 0% to -3.0% from -8.0%, and now expects a peak-to-trough fall of -12%, up from the -15-20% previously anticipated.
Despite this apparent buoyancy, both Morgan Stanley and Jarden remain cautious for similar reasons.
Jarden noted the improvement in house prices appeared to be largely a result of record low listings, with both new and total listings at record lows.
To quote Morgan Stanley, "price increases, on the back of low transactions, have typically not been consistent with sustained rallies in house prices".
Moreover, affordability remains a key issue. Jarden highlighted the national house price to householder income ratio remains near peak levels, while repayments are now at 40% of income nationally, which is a record.
Morgan Stanley also anticipates higher servicing costs from not only additional RBA hikes, but also the switching over from fixed rate mortgages. Additionally, a weaker labour market is expected to further impact on affordability and dampen some of the recent sentiment boost.
Surprisingly strong retail sales in March
Despite deteriorating confidence, rising cost of living and the cycling of lockdowns, March ABS retail sales data exceeded Jarden’s expectations.
A material slowing in discretionary categories is yet to unfold, notes the broker, though some weakness was evident for household goods, which fell by -5.7% year-on-year in March. Moreover, the fashion category rose by only 3.6% compared to the 6.2% increase in February.
Other high frequency data suggest to Jarden non-food trends have softened further in April and May, with promotional intensity also lifting as costs rise.
In stark contrast, food continues to accelerate, up 8.6% in March, consistent with recent quarterly results by Coles Group ((COL)) and Woolworths Group ((WOW)), observe the analysts. It’s felt Woolworths and Aldi are taking market share.
Jarden sees upside to its forecasts for both Coles and Woolworths, given the ABS data suggests trading towards the end of the March quarter was more brisk for Food & Liquor than indicated by the quarterly results.
Woolworths is the broker’s top pick due to margin tailwinds, share gains and increasing consumer engagement.
The market consensus view of a slowdown in consumer spending is moderating, suggests Jarden, due to no further deterioration in consumer sentiment and upgraded house price forecasts.
Nonetheless, the broker retains its original slowdown conviction based on a weakening in March-quarter discretionary spending, more conservative ordering by retailers and higher inventories, rising costs and greater competition (mainly Amazon), the impact of direct to consumer (DTC) and new online players.
Overall, Jarden prefers defensive plays or those with lower exposure to housing, such as Woolworths, Metcash ((MTS)), Treasury Wine Estates ((TWE)), Universal Store ((UNI)), Corporate Travel Management ((CTD)) and Flight Centre Travel ((FLT)).
Australian banks’ exposure to commercial real estate
Jarden checks out Australian banks’ exposure to commercial real estate and considers the risks to be lower than for US banks.
Higher interest rates (affecting valuations/cap-rates), the exposure of smaller US lenders to the sector and the work-from-home trend have been conspiring against the sector, leading many to conjecture that the commercial real estate sector may be the next financial markets’ victim, given smaller banks in the US constitute almost 70% of lending to the sector.
Not so in Australia, observes Jarden, where the major banks’ share of real estate lending has fallen to 73% from 87% in 2013; exposures are tracking well below GFC levels; and lending standards were sharply tightened for multi-residential loans in recent years (where Jarden’s REITs analysts perceive the highest risk).
Nonetheless, the broker will be keeping a keen eye to commercial real estate disclosures in upcoming results, and estimates National Australia Bank ((NAB)) holds the greatest exposure to the sector followed by ANZ Bank ((ANZ)) then Westpac ((WBC)).
The broker calculates that a repeat of GFC impairments would translate to a -6% to -7% profit impact.
US gamers generate a disproportionate share of global revenue
The US will generate nearly 20% of global gaming revenues this year, despite there being considerably less gamers compared to China and Europe.
Consumer data platform Statista predicts more than 180m gamers will participate in the United States this year, compared to 760m and 310m in China and Europe, respectively.
China and Europe have a 28% and 12% respective slice of the overall global market, which adds up to around US$157bn in combined revenue.
However, according to data compiled by CasinosEnLigne.com, the average revenue per user (ARPU) in the US gaming market is expected to climb to over US$527 this year, or three times more than in China or Europe.
It seems US players are not being deterred by rising costs for new game releases, now around US$70, according to CasinosEnLigne. Nor are they put off by the surging costs of gaming PCs, consoles, and other equipment, which have doubled in the last decade.
Segment details from Statista show the US mobile games market has the highest ARPU of US$443 in 2023, while the online games segment will see an ARPU of $71.86 this year followed by downloaded games with US$35.72.
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