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In Brief: Iron Ore; Banks; Migration; AI

Weekly Reports | Sep 22 2023

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Iron ore prices surprise but challenges lay ahead; wage growth leading to a resilient mortgage market; migration to surge in the next two years; multi-earning, AI and the gig-economy.

-Iron ore price to face longer-term challenges
-Wage growth supporting mortgages
-Migration set to surge
-Multi-earning thanks to AI

Longer Term Challenges for Iron Ore

Iron ore prices have surprised Citi by moving up to US$124/t (spot), dragging iron ore equities higher. Chinese overproduction of steel persists, for now.

But longer-term trends remain, the broker suggests, being lower Chinese steel production with electric arc furnaces to take share from blast furnaces, rising demand for scrap, and higher demand for high-grade iron ore.

Citi recently declared market assessments of both long-term iron ore prices and costs need to rise. The broker doubts long-term margins for the majors are changed in any material fashion, higher near-term iron ore prices will have a modest valuation impact while raising near term earnings for the iron ore plays.

The broker currently forecasts second half 2023 benchmark iron ore at US$95/t (average), with 2024 at US$100/t. Citi is Buy-rated on Rio Tinto ((RIO)) and Champion Iron ((CIA)), Neutral on BHP Group ((BHP)) and Sell-rated on Fortescue Metals ((FMG)).

The Resilient Mortgage Market

When the RBA began hiking rates to combat surging inflation, it was widely assumed Australian house prices would fall -10%, -15% or even -20%. A step-jump in mortgage rates, exacerbated by the “mortgage cliff”, combined with a cost-of-living hit to household budgets, would force big-time selling with buyers thin on the ground.

It was also assumed that beyond the initial scramble for workers post-lockdowns, the unemployment rate would begin rising as the economy slowed.

That hasn’t happened either.

The resilience of the mortgage market is starting to challenge even the staunchest bank bears, notes Citi. Australian households have been resilient to higher rates, while new home purchasers have largely maintained their momentum despite a large theoretical decrease in their purchasing power. So what drives both?

Both sides of the equation are supported by robust wage growth, particularly among higher-end wage earners, which supports serviceability in offsetting interest and cost of living pressures. While rising rates are a steep drag on borrowing capacity, the cumulative impact of solid and accelerating wage growth is a meaningful offset, Citi notes.

All up, the support to credit growth enables the marginal buyer, which drives new purchases and bails out stressed borrowers. With that in mind, the broker believes expectations for slowing growth and steep housing losses may need to be revisited.

While households redirect spend towards interest payments over consumption, Citi suggests there is a case for relative bank outperformance.

And in related matters…

Migration to Surge

Migration is surging, reports Jarden, with recent data across various measures suggesting a material beat to the federal budget’s FY23 forecast of 400k and upside to the FY24 forecast of 315k.

Net overseas migration (NOM) over the 12 months to March 2023 totalled some 454k. Net permanent and long-term arrivals in the 13 months to July 2023 totaled 405k, with the recent run-rate consistent with NOM running at around 500k.

Jarden highlights three key impacts of greater than assumed migration:

Firstly, an increase in aggregate demand, particularly across essentials such as supermarkets, telcos and banking/insurance.

A rise in labour market supply, which should help alleviate some skills shortages but will likely see unemployment drift higher. (The current population growth requires around 30k jobs per month to hold unemployment steady, Jarden notes).

Lastly, a worsening of the housing crisis, putting further upward pressure on rents and inflation, but eventually driving an increase in new dwelling construction.

Importantly, Jarden declares, this surge in migration and resulting population growth of 2.2% year on year — the highest since 2009 — should mean Australia avoids a recession, even if the environment feels recessionary for many households.

Where the bloody hell are they coming from?

India represents 27% of skilled working visas but other key sources include the Philippines (11.5%) and UK (10%). Most skilled visas have gone towards professional services.

In terms of student visas, 19% come from India and 16% from China.

Most temporary residents (particularly students) are more likely to work in the hospitality sector, Jarden notes. The sector which has seen the greatest relative uplift in visas is mining, with a 74% increase on FY19, helping ease labour shortages.

What you didn’t know about AI

It had been Morgan Stanley’s assumption that so-called gig-working and employee bargaining would diminish post-covid. But in contrast, “multi-earning” – holding down multiple jobs – has evolved into a secular growth theme (in the US), the broker has found.

And it’s all down to Generative AI.

Morgan Stanley (US) had originally argued that as structural automation trends gather pace, the number of non-mission-critical roles in the economy would likely diminish. But offsetting this, multi-earning has been growing in popularity.

The broker had assumed that a combination of waning employee bargaining power and return-to-office initiatives post-covid would diminish multi-earning. Latest data refute this.

Multi-earning has risen around 8% year between Morgan Stanley’s surveys, driven by cost of living pressures and Gen Z uptake. Low-earners have seen the greatest increase year on year, in excess of 15%.

Official data show 5% of the population working multiple jobs to make ends meet, growing at a 5% compound annual growth rate. However, unofficial data show 8-10% of the population multi-earning to widely varying degrees, with engagement growing in excess of 18% CAGR.

Morgan Stanley would argue that knowing the characteristics, level, and trend of multi-earning should be as important to a C-Suite as it should be to stock-pickers.

The broker’s surveys suggest consumers are “loosely” using Generative AI for three things: homework, saving time and making money. Generative AI tools – particularly multi-modal ones incorporating text, image, and audio – appear set to accelerate democratisation of the gig economy. For only US$160 per month, multi-earners can access a suite of eight platforms, boosting productivity by as much as 55%.

Four times as many US (versus UK) survey respondents have found ways to increase their earning potential with GenAI, albeit 27% of survey respondents cited their employer having banned ChatGPT and other generative AI tools.

Morgan Stanley’s survey shows gig-earners' income boosted 21% by using Generative AI tools versus those not.

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