Macquarie’s cautious outlook

Macquarie expects a ‘slow recovery’ in economic output through this calendar year.

Macquarie CEO Shemara Wikramanayake: Macquarie expects a ‘slow recovery’ in economic output through this calendar year. Picture: Britta Campion

Macquarie Group is urging a cautious approach to the economic outlook in Australia and globally, as parts of the world are gripped with rising COVID-19 infections and new lockdowns.

Macquarie boss Shemara Wikramanayake stopped short of providing full-year earnings guidance on Friday, citing an “uncertain speed” for a global economic recovery.

That came as the asset manager and investment bank reported a 32 per cent slump in interim profit.

But investors seeking insights into the outlook for Macquarie’s divisions and its economic assumptions can look further into the results and its calculations for expected pandemic-related credit losses.

Macquarie’s base case, which it views as “probable”, sees Australia’s unemployment peaking at about 9 per cent in the March quarter, while house prices are tipped to decline 6 per cent in the year ended March 31.

Macquarie expects a “slow recovery” in economic output through this calendar year.

The downside scenario — which Macquarie said remained “possible” — assumes it will take longer to contain COVID-19. It puts unemployment’s peak at 9.5 per cent and predicts a house price plunge of 19 per cent.

Ms Wikramanayake said Australia was benefiting from better health outcomes than many parts of the world, and the fact the federal government entered the recession with comparatively lower levels of debt relative to output.

“The government has been moving, at the federal level anyway, from what they call response to recovery … the focus of the next step is to try and empower the private sector to respond in terms of creating jobs,” she added.

“The ball is in our court now.”

Macquarie’s more detailed guidance for its four divisions underscored the challenges in navigating difficult market conditions.

In the asset management unit, while Macquarie expects base fees in 2021 to be in line with the prior year, it warned part of operating income would be “significantly down”. The drop is due to the timing uncertainty of asset sales and the impact of COVID-19 on its aircraft leasing customers.

Citigroup analyst Brendan Sproules attributed the lack of top-line earnings guidance to the fact Macquarie’s second-half profit could be swung by key deals, including the full or partial divestment of its stake in software group Nuix.

“Management again declined to provide guidance, noting uncertain market conditions. We expect the reluctance on management’s part reflects the material impact that individual transactions could have on the second-half 2021 result, such as Nuix,” he said.

CLSA analyst Ed Henning said: “Looking at the short term divisional outlook, the main change is the more bearish outlook for commodities and global markets.”

Macquarie said the commodities and global markets division was expected to post second-half earnings “significantly down” on the prior six months, given subdued customer activity. The specialised and asset finance area within that division would make a consistent contribution to profit.

In the banking and financial services unit — where loan repayment pauses dropped to 2.6 per cent of the portfolio — Macquarie said there would be ongoing provisioning as customers traversed the pandemic. At their peak, loan repayment pauses affected 13 per cent of Macquarie’s loan book.

The company expects higher deposit and home loan volumes will continue in the next five months, although competition was weighing on margins.

Expectations are for the investment bank, Macquarie Capital, to see earnings hit by challenging markets, as deal volumes are curbed and times to complete transactions become stretched. Strong capital raising activity in the first-half won’t continue, and Macquarie estimates the division’s 2021 year will see income “significantly down”.