In Brief: US Dominance Rests On Tech & Liquidity

This story features JB HI-FI LIMITED, and other companies. For more info SHARE ANALYSIS: JBH

Weekly Broker Wrap: Experts talk big on US financial dominance; Jarden and Canaccord dissect the outlook for Australian retailers; and Barrenjoey lends its ear to management from the REITS sector.

-Speculation about the end of US dominance looks (very) premature
-Retailers pulling out all stops to drive earnings, will the tax-cuts save them?
-Property markets continue to adjust to higher-for-longer interest rates, are we there yet?

By Danielle Ecuyer

US dominance: the trillion-dollar elephant in the room

The bears are congregating around several narratives including Ai bubbles, the demise of US treasuries and the US dollar with American exceptionalism in decline.

Not so, according to Oxford Economics who articulates the “enduring appeal” of US Treasuries to Japanese investors.

The premise is simple. Demand dynamics are unlikely to shift with the large yield gap differential between US treasuries and Japanese JGBs, even with the recent increase in Japanese yields.

Japan is the largest holder of US treasuries at around 49% of total ownership by foreign bond investors.

The rise in yields over 2022 caused investors and banks to dump US treasuries, only to return to the market in 2023 as the Fed’s hiking cycle entered the final phase. 

Life insurers are the exception, due to the buying of longer dated JGBs ahead of foreign bonds.

Oxford Economics thinks it is unlikely the 10-year JGB will reach 2% from the current 1% level, unless term premia rise substantially, or simply put: the additional yield investors demand to hold a 10-year JGB rises a lot.

Global liquidity continues to rise and boosts US dollar assets and the currency

The lauded global expert in global liquidity, Michael Howell of CrossBorder Capital entered the US dollar debate this week.

Howell stated the latest capital flow data point to ongoing strength in foreign money inflows into US assets, up until the end of May this year.

No letup is anticipated. The US Federal Reserve and Treasury are expected to ease and increase liquidity, respectively, into the second half of 2024.

The US monetary inflows typically adjust via Wall Street in terms of higher asset prices, with Howell stressing he does not advocate ‘value investing’ because “fast-moving footloose border flows cause ‘momentum investing' to drive returns.”

Notably, Crossborder Capital’s piece, “China Sneezes…The Dollar Milkshake Blows-Off” depicts how China’s growing trade surplus underpins the US dollar, alongside more conventional views of slowing global growth supporting the US dollar.

While some may question the global liquidity analysis, anecdotally the US stock markets have remained resilient with the indices hitting all-time highs, driven to a large part by technology stocks and those specifically in the GenAi megatrend and ‘momentum’ trade.

Howell forecasts Fed liquidity will rise by around 12% in 2024 on 2023. and experience over 20% annualised growth in the second half of 2024.

Hold onto your hats!

Will the US economy and markets continue to dominate?

Chief Economist, Jennifer McKeown from Capital Economics poses the question and concludes the US dominance and global leadership has good reasons to remain robust.

Taking a snapshot of McKeown’s overview, US economic strength is magnified by its policies, underpinning per-capita and real GDP growth, including population growth which is still accelerating at a faster pace than other G7 economies.

It has the highest level of GDP per capita among major economies, since circa 1900, excluding small financial hubs and select energy producers.

Technological leadership is another strong feature, with the World Intellectual Global Innovation Index consistently rating the US as one of the top three innovators, alongside Switzerland and Sweden. 

China, in contrast is missing the regulatory and institutional frameworks to enhance and capitalise on its innovations.

Venture capital also plays a significant role for US start-ups and the evolution of technological innovation. Twelve out of the Top 20 ranked global universities are in the US, as does the quality of the workforce; the favourable regulatory backdrop and the consistently high spend on research and development, ranking only behind Korea and Taiwan.

For US dominance, one cannot look past the financial leadership. 

“The US has the world’s deepest and most liquid financial markets”, states Capital Economics, of which few would choose to argue against.

The US bond market stands at US$51trn compared to US$21trn for China and US$20trn for Europe, and the US dollar remains the dominant world currency, even as BRIC countries try to move away from its hegemony.

On balance, the US economy may not be number one in all aspects, but on balance it ranks highly if not number one across several relevant criteria.

Retail in the dump(ster)?

One doesn’t have to be Robinson Crusoe to see the pain in the consumer discretionary sector with targeted sales and discounting coming thick and fast.

Purely an observation, which is seemingly backed up by official ABS statistics, and failing consumer confidence.

In the fortieth case study of online transactions across 25 sites in Australia, Jarden highlighted traffic declined around -2% in May across 52 brands, with durable goods and travel (falling airfare prices) leading the way.

Amazon continued to grow market share with Temu, SharePoint, Microsoft and Chemist Warehouse benefiting from declines in Gumtree, OzBargain and eBay.

For those dismissing Gen Ai as a bubble, interest in Microsoft has risen notably over the last three months, ahead of the CoPilot+PC launch on June 18; not that anyone could miss the event just looking at the JB HiFi ((JBH)) website.

Overall, inventory levels are rising, and as anecdotal evidence would suggest, promotions are also on the up, notably for household goods.

The boomers are spending, while mortgage holders and the young are under the pump.

Extrapolating out to companies, Jarden prefers those stocks with expansion plans and improving returns on capital, which includes Flight Centre ((FLT)) on Buy and a $23.50 target, and Woolworths Group ((WOW)), Overweight rated with a $39.90 12-month target price.

Helloworld ((HLO)), Webjet ((WEB)), Temple & Webster ((TPW)), The Reject Shop ((TRS)) and Domino's Pizza Enterprises ((DMP)) are also in the preferred basket.

Super Retail Group ((SUL)), Premier Investments ((PMV), Coles Group ((COL)) and Accent Group ((AX1)) are all Neutral rated.

Brick and Mortar retailers not so cheap

Over at Canaccord Genuity, the broker needs some “retail therapy” but cautions the brick-and-mortar retailers are not offering as much value as they have done in the past.

Put another way, the valuations are relatively looking a bit rich, which places stock prices at risk if the news flow doesn’t meet expectations.

Although, the upcoming tax cuts and the recycling of weak comparisons in the previous year might sustain company earnings into the August reporting season and the first half of FY25.

Overall, the picture is hardly appetising and the broker, like the consumer, remains cautious and can only rustle up a Neutral weighting on the retail sector.

Focusing on individual stocks, Adairs ((ADH)). Collins Food ((CKF)), Dusk Group ((DSK)), KMD brands ((KMD)) and Lovisa Holdings ((LOV)) are rated Hold, with price targets of $1.92, $9.25, 70c, 42c and $29, respectively.

Both dusk Group and KMD brands copped a downgrade in the target price by -23%.

Real Estate: The wash out from low interest rates yet to play out

Barrenjoey took a deep dive into the domestic real estate sector hosting a conference with management from some of Australia’s largest REITs.

Office valuations in the US have fallen -35% and could ultimately decline -50% through the cycle.

More blood on the streets?

Looking at the ongoing concerns for US regional banks, the observation is the market is super cautious regarding commercial property exposure and who or what might be dragged down in the valuation reset.

Hardly surprising with this outlook there are large dollops of international capital sitting on the sidelines and waiting to be deployed in real estate.

Institutions remain underweight the historical benchmarks.

Back home, superfunds are continuing to experience strong equity inflows and are viewed as continuing to allocate to traditional and alternative real estate sectors.

On balance, the Australian market has lagged overseas counterparts like the US and Europe in the decline in cap rates (valuations).

The report states the current circa 8% rate suggests another six months to a year for rates to fully adjust.

Breaking down the sector preferences, investors are aligned with logistics, retail, and alternatives like student accommodation, healthcare, self-storage, and private credit.

Build-to-rent is suffering from higher construction and financing costs. 

Interestingly, Sydney’s CBD Office has bottomed and is expected to recover, occupying a hefty 45% of the MSCI Australia Wholesale Property fund Index, in other words: too big to avoid.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

FNArena is proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms