From Moody’s:
Summary
Moody’s Investors Service held its annual Australian Outlook Briefings in Sydney and Melbourne in February 2015. The two events brought together the country’s largest investors, intermediaries and debt issuers, as well as Moody’s analysts to consider the most important credit trends likely to affect Australia’s corporate, infrastructure, banking and structured finance sectors in 2015. Some of the key conclusions from the events, including the results of audience polling, are detailed as follows:» A hard landing in China is considered the biggest risk to Australia’s corporate sector, but we think this scenario is unlikely. China’s growth outlook dominated market concerns. Participants were more concerned about the risk of a hard landing in China than about the slowdown in Australia’s resources cycle. We believe that a hard landing in China is unlikely. We expect that China will exhibit an orderly growth slowdown, and that the country’s economic and institutional reform process will be well managed. This scenario is reflected in our GDP growth projections for China of 6.5%-7.5% in 2015 and 6.0%-7.0% in 2016. As for the Australian corporate sector, we hold a stable outlook on the sector in 2015, including in key industries such as metals and mining, building and construction, retail and airlines. More than 80% of the outlooks that we assigned to corporate ratings in Australia are stable. However, the proportion of companies on negative outlook versus those on positive outlook suggests a negative bias over the next 12 months.
» Resources sector weakness will dampen earnings growth. We believe that the aggregate earnings growth for our investment-grade issuers will be dampened by weakness in the resources sector. Market participants agreed that a decline in the resources sector will have a large impact on Australian companies.
» Australian corporates’ average leverage to remain steady through 2015. While the largest number of participants polled agreed with our view that companies in Australia will exhibit broadly steady financial leverage in 2015, the market outlook for leverage was uncertain, with a significant number of participants believing that corporate leverage will fall slightly over the next 12 months. We expect to see modestly higher EBITDA levels in 2015, continued conservative levels of capital spending, and slightly higher levels of shareholder returns.
» The main risk to the regulated utilities sector is an unexpected change in the regulator’s application of the new rules for regulated network businesses. The consensus from the briefings was consistent with our view that the main risk to the regulated utilities sector in 2015 is a material departure by the regulator from its previous approach in applying the new rate of return guideline. The regulator has so far applied the new rules in a manner consistent with our expectations. Our expectation that such a scenario will continue underpins our stable outlook for the sector.
» Uncertain economy and regulation viewed as the biggest headwinds for banks. Uncertainty about the economy and a heavy regulatory reform agenda were rated by market participants as the two biggest challenges facing Australia’s banks in 2015. We hold a stable outlook on Australian banks. While there will be pockets of weakness in the economy, low interest rates should support bank asset quality. Despite concern about the regulatory burden on banks, most market participants did not believe that Australia would adopt a statutory creditor bail-in regime, expecting instead new requirements for minimum levels of issuance of contractual bail-in securities.
» Australian banks may undertake capital raisings. Most market participants believed that Australian banks would move to raise capital in 2015, reflecting a view that some capital strengthening will be needed, as a consequence of potential additional regulatory requirements. Australia’s banks are arguably well capitalized at present. However, the recent Financial System Inquiry recommended that Australian banks’ capital levels should be “unquestionably strong”. Such a recommendation suggests that there is room for capital levels to be lifted further to keep pace with increasing capital levels among their global peers.
» RMBS will continue to perform well, but credit quality of new mortgages may slip. In the structured finance sector, the vast majority of market participants were most concerned about residential mortgage backed securities (RMBS) in 2015, while relatively fewer held fears about asset backed securities (ABS) and covered bonds. We expect that Australia’s RMBS sector will continue to perform well in 2015, but that the quality of new mortgages will deteriorate in an environment of record low interest rates and rising house prices.
A big yawn there. The biggest Australian risk in term of impact may be a Chinese hard landing. But the biggest risk in terms of probability is Chinese restructuring success.
A smooth and crisis-free transition to lower and less-commodity intensive growth in China is a dreadful outcome for an Australia that has just restructured its economy towards endless dirt exports.
That the Chinese rebalancing is transpiring in an environment of international calm can delay the reckoning a little but can’t change the fact that the Australian economy undergo another structural adjustment, this time to better competitiveness to reverse its recently acquired commodity dependency.
The mining bust can only be offset by a housing bubble for a few years, then our own restructuring will begin in earnest.
That’s the risk that Australian investors should be worried about.
