Companies buoyed by economic rebound
Low rates and high commodity prices have boosted growth and household spending, writes Nicki Bourlioufas.
Mentioned: Peoplein Ltd (PPE), Universal Store Holdings Ltd (UNI), Aristocrat Leisure Ltd (ALL), BHP Group Ltd (BHP), Boral Ltd (BLD), Helia Group Ltd (HLI), Harvey Norman Holdings Ltd (HVN), Insurance Australia Group Ltd (IAG), Imdex Ltd (IMD), Mirvac Group (MGR), QBE Insurance Group Ltd (QBE), Accent Group Ltd (AX1), REA Group Ltd (REA), Reece Ltd (REH), Rio Tinto Ltd (RIO), Reliance Worldwide Corp Ltd (RWC), South32 Ltd (S32), Super Retail Group Ltd (SUL)
Australian economic growth has rebounded, with the economy back where it was last year before the COVID-19 pandemic struck, with the mining sector a key driver of growth. Analysts expect the momentum to be maintained over the rest of 2021, supported by low interest rates and high commodity prices.
The economy grew 1.8 per cent over the March quarter 2021, data from the Australian Bureau of Statistics (ABS) showed, or 1.1 per cent from a year earlier. The better-than-forecast figures pushed Australia's benchmark share index, the S&P/ASX 200, to record highs last week over 7,200.
Reflecting higher iron ore and liquified natural gas prices, Australia’s terms of trade reached its highest level since December quarter 2011, rising 7.4 per cent in the first quarter. That contributed to a 3.5 per cent increase in gross domestic product (GDP). Household spending rose 1.2 per cent and added 0.7 percentage points to growth.
Dwelling investment jumped 6.4 per cent, pushed up by rising household construction activity, helped by the federal government’s HomeBuilder scheme. Business investment rebounded with a 11.6 per cent rise in machinery and equipment, the strongest increase since December quarter 2009, the ABS said.
Australia’s economy has experienced a much faster recovery than most OECD countries, with levels of activity now exceeding those prior to the pandemic, as this chart from the ABS below shows. The Reserve Bank of Australia has forecast GDP to grow by 4¾ per cent over this year and 3½ per cent over 2022.
International comparisons of GDP growth to March quarter 2021, volume measures, seasonally adjusted
Source: a. International GDP data obtained from https://stats.oecd.org/ on 28 May 2021
Jamie Nicol, chief investment officer with DNR Capital, said anxiety over the end of JobKeeper and broader government support, has so far proven unfounded, with the population continuing to spend well in excess of pre-COVID-19 levels.
“The national accounts indicate this increased consumption is being funded from savings built up over 2020. The unusual scenario of reduced spending during lockdowns, combined with increased incomes through government support, has seen a record improvement in household balance sheets,” Nicol said.
Several economic sectors, including banking and resources, are benefiting with the rise in economic activity. Iron ore has sustained its record gains over US$200/tonne, and “there is no doubt it has benefited heavily from China stimulus as China accounts for about three quarters of all import demand,” said Morningstar resources analyst Mathew Hodge.
“In terms of BHP Group (ASX: BHP) and Rio Tinto (ASX: RIO) making new highs, it’s possible. But the stocks are not cheap and this is not the kind of environment where I would think they would be,” he said.
Momentum in resources
Emanuel Datt, managing director of the Datt Group, says he expects the resource sector to remain its momentum with higher base metals prices strong due to supply constraints on a global scale.
“Oz Minerals (ASX: OZL) as a pure-play copper producer stands out as a positive exposure to the strong growth in the Australian and world economies. Copper demand is often regarded as a good proxy for economic growth, and we have seen spot copper prices double since the March 2020 lows. Copper is currently trading near five-year highs of over US$4.50/lb and we expect demand for copper to continue given the transition towards lower carbon renewables and electric vehicles,” Datt says.
Simon Shields, founder and portfolio manager at Monash Investors, said despite closed borders and intermittent lockdown restrictions, Australia is showing the sort of cyclical upswing in growth typical in the years before the global financial crisis.
“Growth is no longer scarce for economically sensitive domestic companies, like discretionary retailers Harvey Norman (ASX: HVN), Super Retail Group (ASX: SUL), Accent Group (ASX: AX1) and Universal Store Holdings (ASX: UNI), labour hire (People Infrastructure ASX: PPE), building materials (Boral (ASX: BLD), Reece (ASX: REH), Reliance Worldwide ASX: RWC ) and housing related companies (REA Group (ASX: REA) and Mirvac Group (ASX: MGR).
“Because it’s also a synchronised global upswing, companies providing resources (Rio Tinto, BHP Group and South32 ASX: S32), and some mining services (Imdex ASX: IMD) are doing very well too,” said Shields.
Retailers poised to benefit
DNR Capital’s Nicol also sees good opportunities for retailers and suppliers. “Super Retail Group continues to benefit from a sustained demand for automotive, home exercise, camping and outdoor products, offering dominant market positions and a strong online offering.
“We see Aristocrat Leisure (ASX: ALL) as uniquely positioned to benefit from increased mobility and high increased levels of disposable income, with exposure to gaming markets around the world,” he said.
For the banking sector, Morningstar banking analyst Nathan Zaia says that while low interest rates “are not the friend of the bank’s bottom line, the usual negative margin impact is somewhat being negated by the level of customer deposits in the system and the RBA’s term funding facility.
“In other words, the banks’ costs of funds has come down. We don’t really think of the boom in construction as a tailwind to banks earnings, but the factors which you would expect to see when construction is hot—low unemployment and strong house prices—helps. It leads to stronger demand for credit and lower loan losses,” Zaid said.
Insurers too such as IAG (ASX: IAG), QBE (ASX: QBE), and Genworth Mortgage Insurance (ASX: GMA) have also benefited from stronger housing activity, Monash Investors’ Shields said.