In Brief: Looming Recession, Oil, Groceries & Wagering

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Weekly Broker Wrap: monetary policy impacts set to weigh; oil price forecasts; steady outlook for the ASX grocery sector & Aussie wagering.

-Monetary policy for advanced economies set to weigh
-Near-term oil price weakness, long-term upside
-Steady as she goes for the ASX grocery sector
– Australian wagering, and catalysts for Tabcorp

By Mark Woodruff

Oxford Economics sees monetary policy impacts hitting soon

The full impact of monetary tightening in advanced economies is yet to be felt, according to Oxford Economics, which is forecasting growth will slip into negative territory either at the end of this year or early 2024, despite surprising resilience to date.

So resilient that Oxford upgraded its baseline forecast for world GDP growth to 2.4% in July from 1.5% in February.

Via its proprietary forecast model, Oxford recently mimicked the commodity/energy and interest rate shocks experienced by the world economy since 2021, a period which captures the effects of the large US fiscal stimulus.

The simulated growth for world GDP as at the first quarter this year, came in around -1% less than what occurred, leading Oxford to suggest there has been underestimated support in Europe courtesy of the steep fall in energy prices (especially for gas) since the third quarter of 2022.

Another potential explanation for the disparity may be the support for consumer spending in the US provided by low savings rates, while in the G7 government intervention mitigated the pass-through of energy prices to households.

Moreover, structural changes which delay the effect of interest rate rises and reduce them in scale could have made major economies less sensitive to changes in policy rates, according to Oxford. It's felt the impact of monetary policy on asset prices has already eased since the end of 2022.

Along with recovering equity prices, long-term bond yields have flattened despite ongoing interest rate hikes and house prices are hinting at stabilisation.

Structural changes include a higher share of fixed-rate debt, especially among mortgage borrowers and longer debt maturities, explains Oxford.

In one harbinger of trouble, Oxford cautions US speculative debt maturities will be four times higher by 2025 than in 2022 and three times higher for those in the rest of the world.

Oxford predicts the full impact of monetary tightening will be felt most keenly via money and credit channels.

Consistent with relatively large declines in investment in the past, Oxford Economics points out the latest Federal Reserve survey in the US showed a tightening of corporate credit standards by 50% of banks.

Near-term oil price weakness, long-term upside

While oil price risks are leaning to the downside over the next three-to-six months, on a five-to-ten-year timeframe Longview Economics believes the case for owning oil is strong.

In the absence of meaningfully higher oil prices, US oil production growth will continue to weaken over coming years, according to Longview’s US shale forecast model.

Longview is negative on the near-term because the oil price is technically overbought and there’s potential for a US recession, probably commencing later this year or early 2024.

Additionally, sentiment in the market is bullish, which is considered a sell (contrarian) signal.

Despite holding this negative short-term view, Longview was building a long position in mid-June and anticipates adding to the position in the event of near-term weakness, given the oil bear market is reasonably advanced.

The global production outlook is poor as global energy capex has trended down for the past ten years.

Longview focuses on US shale by analysing its two key drivers of production growth, namely new well production and legacy well declines.

The conclusion up front: the slowdown in US shale supply growth is structural and after five years production losses will equate to losing Venezuela’s total production every month.

In what is actually an optimistic scenario run by Longview, monthly well completions over the next five years will be broadly flat. US shale well productivity is also expected to be unchanged over the same period.

Productivity gains are becoming harder to achieve, explains Longview, because of the falling availability of profitable oil wells, with declining tier 1 acreage and an increasing reliance on lower productivity wells.

Moreover, production from legacy wells is falling at record rates.

Due to the natural decline profile of shale wells, as more wells commence and progress to few months of production, Longview Economics explains the number of wells with rapidly falling production grows.

Steady as she goes for the ASX Grocery sector

Jarden remains overweight the ASX Grocery sector and suggests population growth and the trend for eating-at-home will partly (or wholly) counter increasing competition, discounting, new consumer behaviours and costs.

Improving volumes are expected to support sales growth of 5-6% through FY24, within which gross margins should rise owing to an improving own brand mix, and the broker forecasts earnings (EBIT) margins will rise by around 10 basis points across the sector.

An ongoing rational market is the most likely scenario, with price increases where appropriate, while the broker expects market share gains by discounters such as Aldi will remain moderate through FY24, as evidenced by data over recent months.

A price war is considered extremely unlikely based on what Jarden has seen recently in the UK, US and the EU. It’s thought the Australian market lags the UK and US by around six months.

Regardless of this steady-as-she goes outlook, Jarden is monitoring profit risk should volumes not accelerate as expected and the cost-of-doing-business (CODB) rises.

After all, the broker sees indications the majors are responding to a more than 20% year-on-year increase in momentum for both Costco and Aldi, with the latter also lifting its focus on branded.

On a stock basis, Overweight-rated Woolworths Group ((WOW)) remains Jarden’s preferred exposure to the sector due to its own brand mix and cost-out, along with greater relative scope to negotiate better terms from suppliers.

In the fast-moving consumer goods (FMCG) space, the broker also has Overweight recommendations for Endeavour Group ((EDV)), Costa Group ((CGC)), Treasury Wine Estates ((TWE)) and Lynch Group ((LGL)).

Consensus believes Coles Group ((COL)) will outperform over FY24 and FY25, though Jarden currently has a Neutral rating. However, Jarden notes feedback is becoming more positive around execution and senior leadership, while suppliers are thought to be keen to support the group.

Metcash ((MTS)) will underperform, according to consensus forecasts, a view Overweight-rated Jarden is coming around to as recent industry commentary points to a material slowdown for sales, which also aligns with falling share trends, which have stabilised in recent weeks.

Australian wagering and catalysts for Tabcorp

Prior to FY23 results for Tabcorp Holdings ((TAH)) on August 24, Macquarie has already allowed for heightened regulatory risks in its below-consensus FY23 and FY24 forecasts due to possible restrictions on marketing and generosities.

Thankfully the broker has also incorporated softness in wagering volumes into its estimates.

While luck has bolstered net revenue, there has been a fourth consecutive quarter of falling turnover in the three months to June for Australian wagering operators who, according to Macquarie, are cautious on the outlook.

The sports segment of the industry has been showing growth and is where the luck largely occurred. However, the broker suggests this good fortune will revert to the norm and sports only accounts for around 20% of the overall wagering market.

The problem centres on softening demand in racing, which represents the remaining 80% of industry volumes.

There was an industry-wide improvement in combined net yields for the June quarter to 12.8% (trend is 11%), driven by the luck in sports and lower generosities, explains the analyst. The latter is expected to be ongoing and improve net yields on a structural basis.

Apart from the FY23 result, Macquarie notes an upcoming catalyst for Tabcorp is any updates surrounding the regulatory environment.

The broker is Neutral-rated on Tabcorp Holdings with a 12-month target price of $1.15.

The average target of the five brokers (including Macquarie) updated daily by FNArena is $1.18, suggesting around 11% upside to the latest share price.

Of the five brokers, two have a Buy (or equivalent) rating while there are three Hold recommendations.

Overweight-rated Jarden is not updated daily. This broker has a target of $1.18.

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