Fast Facts: Debt Doubling, Investment Markets, Household Goods Retailing

Weekly Broker Wrap, In short: Debt will double amid rising interest rates, flows downgrade for small cap investment platforms, home goods retailers will suffer from tighter discretionary spending.

-Double the public debt in three years to weigh on taxpayers
-Small cap investors should expect continued volatility in the market
-Discretionary spending on household items likes to be mastered in advance

Taxpayers are tasked with paying the piper as debt per person doubles

The cost of the covid pandemic will impact taxpayers for years to come, with heavy borrowing under a zero covid policy expected to have long term impacts in Australia. The country’s debt burden increasing by 11.2% in 2021 to reach $1.462 trillion As global debt servicing costs have fallen to a record low of 1.6%, the looming threat of higher interest rates is expected to significantly increase national debt.

Economists at Janus Henderson predict that Australia’s debt per person will double by 2025 to $68,806 thanks to the cumulative effect of rising interest rates. Australian borrowing in response to the pandemic has exceeded the global average, with global debt increasing by 7.8% in 2021 compared to australia 11.2%. While Australia benefited from a low debt-to-gross domestic product ratio when borrowing, with a -47% discount to its international peers allowing it to remain one of the least indebted major industrialized countries despite the huge increase borrowing, rising interest costs appear to be spurring Australia’s debt to rise to a rate higher than the UK and Europe in 2022.

Janus Henderson forecasts that global public debt will increase by 9.5% in 2022, with United States, Japan and China identified as major drivers, while global debt servicing costs will increase by around 14.5% due to rising interest rates.

Market volatility makes it hard to read on investment platforms

Market rebounds since the first-half earnings season prompted Citi to upgrade its outlook on small-cap investment platforms, but the brokerage notes a high likelihood of volatility ahead. While the ASX-300 has improved 3% since the companies released their first half results, the broker expects the geopolitical dispute between Russia and Ukrainerising interest rates and the threat of further covid outbreaks will continue to cause market uncertainty, and anticipates a decline in net flows as a result.

Taking into account the impacts of the better-than-expected market result in recent months for investment platforms Netwealth Group ((NWL)) and Hub24 ((HUB)), Citi raised its funds under administration forecast for each company by 1%. On the expected volatility of the market, the broker lowers its flow forecast for Netwealth for $14.3 billion from $14.8 billion but remains above the company’s forecast by more than $13.5 billion. Citi analysts also noted that medium-term earnings should benefit from a shift to specialized investment platforms.

Similarly, Citi is lowering its cash flow forecast for Hub24 for $13.0 billion from $13.7 billion, noting that the platform increased the number of advisors by 49% year-over-year in the second quarter, which seems to be a positive indicator for future growth. The broker expects Hub24 to also benefit from an emerging trend in specialized platforms and forecasts a compound annual growth rate of 23% in earnings per share over the next three years.

Retailers continue to build inventory as inflation appears to impact discretionary spending

Concerns that the recovery in the travel industry would see consumers redirect discretionary spending away from purchases of furniture and household items have yet to materialize. After a fairly flat start to the year for retailers, consumer reports suggest an increase in sales in March, indicating continued resilience in the sector for now.

Furniture and homewares retailers suggested they would continue to stockpile to maintain high inventory levels as supply chain constraints are expected to continue in the coming fiscal year. Meanwhile, higher transportation costs and the additional costs of holding higher inventory levels look likely to impact retailers’ margins.

Inflation will also likely come into play for the industry going forward, with expected inflation of 4.5% year-on-year likely to impact furniture and homeware retailers, given that the Rising inflation is historically inversely correlated to discretionary spending on household goods.

Considering both Adairs ((ADH)) and Temple and Webster ((TPW)), analysts at Jarden noted that Adairs’ loyal member base contributes about 80% of customer sales, while its dual physical and online presence hedges the risk of changing consumer trends. Temple and Webster, meanwhile, offers less exposure to supply chain constraints given that its third-party direct-ship products account for 74% of total sales and the company has strong visibility into supplier inventory levels. . Additionally, the company’s emerging trade and DIY categories, which now account for 11% of sales, provide a buffer against falling furniture and homeware sales.

Going forward, Jarden sees an opportunity for retailers to differentiate themselves through innovation in the digital space. The broker expects retailers who commit to investing in digital experience, capabilities and customer acquisition can improve their competitive position in the post-covid world.

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