Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.
Australian unemployment is down with retail sales, manufacturing, and building approvals all up and near-record highs resulting in very high inflation expectations. Welcome to the world of Australian economic indicators!
Australian unemployment 5.5%
Australia’s seasonally adjusted unemployment rate surprised last week clocking in at 5.5% in April which is the lowest reading since March 2020. Market consensus was for a 5.6% reading which would be unchanged from the previous month. The devil is in the detail though with the participation rate falling 0.3% to a six-month low of 66%, absolute jobs down 30,600, and monthly hours worked in all jobs down 0.7% to 1,793 million hours.
An important indicator for future inflation is Australian Consumer Inflation Expectations which rose to 3.5% in April from 3.2% in March but below market consensus of 3.6%. Inflation in the previous quarter was 1.1% but all eyes will be on Q2 numbers which will be released in July. The RBA’s mandate targets inflation at a rate of 2-3%, so if this high inflationary expectation persists above 3% then an earlier than expected rise in the cash rate is on the cards. v
Retail Sales & Consumer Confidence
Retail sales are an important leading indicator as they flow through to inventory levels and manufacturing activity. In April, retail sales surprised to the upside clocking in at 1.1% against consensus expectations of 0.5% but down from the March level of 1.3%. Food retailing led the rise but department stores lagged behind. Importantly, the Westpac-Melbourne Institute Index of Consumer Sentiment fell 4.7% MoM to 113.1 in May. While the negative trend is never a good signal, the May reading is still at a very high level and is coming off an 11-year high in April.
Australia Manufacturing PMI
The Ai Group Australian Performance of Manufacturing Index has been in a strong positive trend since Nov 2020. In April the index increased for its 7th consecutive month to 61.7, its highest level since March 2018 and third highest on record. All six manufacturing sectors and all seven activity indicators expanded in April with capacity utilisation index hitting a record high. The primary implication of this is further expansion in investment and employment needed in order to facilitate further growth which could result in further inflation.
Building Permit Approvals
The March building approval numbers were released in May with a seasonally adjusted rise to 17.4% which follows a 20.1% increase in February. The increase was driven by private sector dwellings excluding houses which rose 63.6%. Private sector housing approvals only rose 0.1% but reset the record high from the previous month thanks to the Federal government HomeBuilder stimulus.
Challenger is an investment management firm focusing on providing Australians with financial security in retirement and operates with two core investment businesses, Life and Funds Management.
In Q3FY21, Challenger delivered a strong performance with FUM increasing by 8% and exceeding $100 billion for the first time. This was driven by record quarterly Life book growth of 9.2% for the quarter and $7 billion net flows in Funds Management. Despite a decline in credit spreads over the year, CGF has adjusted annuity pricing to incorporate changing investment conditions and reaffirmed its FY21 normalised net profit before tax guidance. Managing Director and CEO Richard Howes has a positive outlook for CFG as, “Challenger remains well positioned for continued growth with diversified revenue streams in the Life business and differentiated Funds Management offering.”
CGF is currently trading at a one-year P/E of 13.4x and offers a gross yield of 4.1%.
Invocare owns and operates funeral homes, cemeteries and crematoria around Australia, New Zealand, and Singapore. They operate 333 funeral locations under various brands such as White Lady Funerals, and Simplicity Funerals handling 45,000 cases annually.
IVC has been experiencing short-term headwinds with Covid restrictions on funerals and a more health conscious population subduing death rates at 2.5%. This has had a negative impact on the share price which has retreated from a $12.15 high in February to $10.27 in May. The company has a long-term strategy in place to reinvigorate its suite of brands to leverage them into greater market share as the Australian population continues to age.
IVC is currently trading at a one-year P/E of 33.5x and offers a gross yield of 3.6%.
Auswide is an approved deposit-taking institution and licensed credit and financial services provider. With an asset base of over ~$3.5b and a branch network of 23 locations servicing primarily regional customers in QLD, NSW, and VIC. The emerging bank is experiencing strong growth across various metrics in its latest H1 FY21 results including 10.6% increase in deposits, 13.4% increase in loan book, 10.9% increase in net interest revenue, and NPAT improvement of 23.9% to almost $11.5m. With the big 4 closing regional branches, Auswide has an opportunity to capture the hole in these regional markets.
ABA is currently trading at a 13.07 trailing P/E ratio and a dividend yield of 4.3%.
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