The recent devastating floods that hit Queensland and parts of Victoria and New South Wales will have an immediate short-term impact on Australia’s economic performance and repercussions for many stocks and sectors, according to market experts.
The Australian insurance sector in particular is one of a number of industries that faces a significantly uncertain outlook following the floods, Aviva Investors investment manager Andrew Hamilton says.
“There remains significant uncertainty over the outlook for the insurance sector, with the risk of continued heavy rain over the wet season,” Hamilton says.
“The cost of reinsurance is also likely to rise and as a result retail premiums will undoubtedly be higher next year as the insurers try to cover cost increases.”
He says the immediate impact of the recent floods would be a fall in profits as insurers were forced to pay out on many policies.
“Within the sector, Suncorp has the largest market share in Queensland and is likely to be worst affected as it does provide flood insurance under its Suncorp-branded policies,” he says.
“The cost to Suncorp is estimated to be at least $200 million, at which time its aggregate reinsurance program will be triggered and the remaining cost will be covered by its reinsurers.”
Lincoln Indicators equities analyst Michael Feller says insurers such as Suncorp and Insurance Australia Group (IAG) have obviously been the most affected given the pressure that has been put on their share prices recently.
IAG on 4 February announced that claim costs from the storms and floods in Queensland and northern New South Wales were estimated to total $110 million to $130 million, while those from the severe weather in Victoria are anticipated to total $25 million to $40 million.
The estimated net cost to QBE for the Queensland catastrophe in late 2010 is $45 million, while the three catastrophes in Queensland, northern New South Wales and Victoria in January 2011 will cost around $100 million, QBE told the market earlier this month.
“The very preliminary estimate of Cyclone Yasi on 3 February 2011 is around $100 million,” QBE chief executive Frank O’Halloran says.
“We have had 4500 claims reported to date from the December and January storms.
“The claims for 2011 are well within the significant allowances for large risk and catastrophe claims included in our 2011 business plans, which after the worldwide aggregate protections are close to $1.5 billion.”
UBS analyst James Coghill says the Queensland flooding demonstrates the resilience of the sector.
“It is still early days, but so far the listed insurance sector appears to have absorbed the financial impact of this event relatively well,” Coghill says.
“The insurance industry is now absorbing its fourth weather event with insured losses above $1 billion in under two years. This follows no serious insurance-related capital stress from the global financial crisis.”
He says given significant reinsurance protections, IAG and Suncorp could still emerge from this crisis with the capability to return capital to shareholders in six to 12 months.
Other than having a significant impact on insurers, the floods and Cyclone Yasi have hit the coal, transport and agricultural sectors the hardest, Feller says.
Hamilton agrees the widespread flooding in Queensland has important investment implications for other sectors of the Australian share market, including transport and retail.
Aviva Investors believes QR National is one of the worst-affected companies in the transport sector given supply disruptions and the potential costs of repairing its own rail infrastructure damaged by the floods.
“Other transport companies that have been affected include Toll Holdings, which has a large franchise in north Queensland and the closure of the highway that services Rockhampton has impacted volumes,” Hamilton says.
“The floods have also resulted in many people cancelling Queensland holidays and Brisbane airport was also closed for several days. This is likely to have a near-term impact on airline earnings for Qantas and Virgin Blue.”
Virgin Blue says it is continuing to assess the impact of the recent major flooding events, including disruption of operational and administrative activities.
“Operations to all ports are returning to normal, including the corporate headquarters in Brisbane, which were evacuated during the floods,” the company says.
“The slowdown in consumer spending experienced across the discretionary retail and leisure sector, together with the recent floods in the eastern states, could have a significant impact on trading conditions over the coming months.
“The extent of this impact on revenue cannot be accurately estimated at this time, but could be up to $40 million.”
AMP Capital Investors (AMPCI) estimates the floods could cost $15 billion due to the amount of damage inflicted not only on residential and commercial property but also vital economic infrastructure, such as roads, electricity, mines and railway, with rebuilding to be spread over several years.
“Overall economic activity could be reduced by around 1 per cent with a part of this showing up in the December quarter last year, but the bulk of the impact, around 0.8 per cent, occurring in the current quarter,” AMPCI head of investment strategy and chief economist Shane Oliver says.
“As such there is a chance that March quarter gross domestic product growth could actually be negative.”
AMPCI also expects higher food prices, with the floods adding around 1 per cent to inflation spread across the March and June quarters.
That’s bad news for retailers and consumers, who are already weary after the government recently announced that it wants to impose a flood tax levy on people earning over $50,000 and the Reserve Bank of Australia’s (RBA) aggressive rate hikes in 2010.
People earning between $50,000 and $100,000 would pay 0.5 per cent of taxable income in excess of $50,000. Workers who make over $100,000 would pay 0.5 per cent of taxable income over $50,000 and 1 per cent of taxable income in excess of $100,000.
Flood victims would be exempt from paying the new tax.
RBC Capital Markets senior economist Su-Lin Ong says the levy is a further headwind for already cautious consumers.
“While the net impact is modest and we note that the levy will be paid through tax taken out of regular pay, it will come into effect at a time when discretionary spending is already restrained amid increasingly price-savvy consumers,” Ong says.
The flood levy is a tax on consumption that will weigh on consumer sentiment and is an additional restraint on household spending, ANZ head of Australian macroeconomics Katie Dean says.
“We estimate that it is worth around half a 25 basis points rise in the RBA cash rate,” Dean says.
The government estimates the flood levy will raise $1.8 billion, which is equivalent to 0.12 per cent of GDP, according to ANZ.
Overall the government has announced $5.6 billion in spending cuts and revenue raising measures to fully fund post-flood reconstruction efforts.
Oliver says other major negative impacts from the floods include lost coal production, reduced agricultural production and a hit to tourism and transport.
“Queensland normally exports about $2.8 billion worth of coal a month,” he says.
“It’s estimated that $2.3 billion of coal sales has already been lost. With only 15 per cent of its coal mines operating at full capacity due to flooding or lack of transport and likely to take three to six weeks and possibly months in some cases to get back to normal it’s likely that coal exports will be reduced, possibly by around $5 billion spread over December to February.”
The disruptive effects associated with floods may also result in a delay to the start up of some mining-related projects, he says.
However, the net impact on GDP from the floods is likely to be less because rebuilding and reconstruction will start to provide a boost to economic activity from the June quarter.
“By year end it’s likely rebuilding and reconstruction will have resulted in a 0.5 per cent boost to GDP, and as a result the net impact on GDP growth this year will be of the order of minus 0.5 per cent,” Oliver says.
“In other words, rather than 3.5 per cent GDP growth through the course of 2011 as we had originally assumed, this will now likely be around 3 per cent, with much if not all of this growth concentrated in the second half of the year.
“An additional factor which will help reduce the negative impact on economic activity is that the disruption to the production of coal and some agricultural commodities will be partly offset by higher prices received for those who are still producing.”
He says that while the floods still have the potential to add to short-term uncertainty, AMPCI saw no reason to alter its view that the S&P/ASX 200 Index will rise to 5500 points by the end of the year.
Australian shares are not expensive given they are trading on a forward price-to-earnings multiple of 13 times, compared to 15 times a year ago and an average of 14.5 times over the past 15 years, he says.
“The profit implications from the flood are likely to be less than feared, reflecting the benefit of higher prices, particularly for coal. As a result, profit growth is still likely to be solid this year at around 10 to 15 per cent,” he says.
“A pause in the interest rate tightening cycle is likely to be positive for consumer spending, housing construction activity and credit growth helping retailers, builders and banks in the short term once the flood is over.
“Building material, construction and engineering companies and ultimately retailers could be key beneficiaries of the rebuilding after the floods.”
Hamilton says Bunnings Warehouse is likely to benefit from the floods as the company is a major supplier of items that will be used in the clean-up operations and it should also experience increased demand for hardware items once repairs and rebuilding get underway.
Aviva Investors expects the RBA is also likely to keep monetary policy on hold in the near term given the negative impact of the floods on overall economic growth.
“This will result in positive retail sales outside of Queensland and may contribute to stronger consumer demand in 2011,” Hamilton says.
