Twiss and Averill analysed what a range of aged-care funding outcomes and maximum repayment periods could mean for the listed sector.
The Ministerial Advisory Group published its report, A Place to Grow Old: Securing the Future of Aged Care, last month.
The report contained 40 recommendations for government consideration, including a substantial above-inflation increase in regulated residential-care prices across the existing bed base in 2027/28, differentiated by care level and region.
“While there is no guarantee that the Government will adopt these recommendations, we view the report as a positive step towards meaningful aged-care funding reform,” the analysts said.
“If the proposed funding increases were implemented, our analysis indicates meaningful upside to the listed operators’ annuity ebitda [earnings before interest, tax, depreciation and amortisation] and cashflow from existing operations, with Radius Residential Care and Oceania benefiting most in percentage terms, because of greater exposure to care earnings.
“Beyond this direct financial benefit, the recommendations could materially improve the sector’s investability by increasing the contribution from defensive, recurring care earnings and improving the quality, resilience and predictability of cashflows.”
Forsyth Barr’s report said changes to resident repayment rules in the RVA now appear likely and that Labour’s policy would increase the sector’s risk profile.
Both major political parties are proposing changes to New Zealand’s RVA that would introduce a statutory maximum timeframe for operators to repay residents’ capital following departure.
The National-led Government’s proposal (maximum repayment period of 12 months, with interest accruing after six months) is broadly consistent with the listed operators’ current practices and should therefore have limited financial impact.
However, Labour is advocating for a substantially shorter repayment timeframe of three months.
“Our modelling suggests the cashflow and balance-sheet impact of Labour’s policy being introduced would be manageable for the listed sector under our base case assumptions,” Forsyth Barr said.
“That said, the relatively small impact on gearing levels understates the resulting change in risk.
“In particular, the three-month repayment period would significantly increase the sector’s exposure to future downturns in the property market,” the report said.
The Ministerial Advisory Group’s recommendations would be a clear positive for the sector if enacted.
It recommends an average real increase in residential-care prices of 7% in 2027/28, followed by further real uplifts in 2028/29 of 4% for existing modern rooms and 14% for newly built rooms.
The investability of the sector would also improve, the broker said.
US bond yields head higher
Despite the best efforts of US Treasury Secretary Scott Bessent, US bond yields continue to grind higher.
The US Treasury this week said it would buy US$6 billion of government debt – following on from Bessent’s plan, announced last month, to try to stem the tide of higher borrowing costs.
Key US 10-year bond yields traded this week at around 4.85% – their highest point since late 2023.
Inflation concerns remain at the forefront, particularly after Brent crude moved above US$100 a barrel as concerns over Middle East oil supplies continued to mount.
Harbour Asset Management said economic resilience and solid earnings have allowed global share markets to withstand higher bond yields so far, much to the surprise of investors.
“Markets entered the year worried that tighter monetary policy and elevated valuations would constrain returns, yet earnings growth has remained strong and broadened beyond a small group of technology stocks,” Harbour said.
“August was a good example – software companies participated alongside semiconductors, small caps outperformed and earnings strength extended into areas such as energy and materials.
“We think that broadening is important.
“Markets driven by a wider group of companies and sectors are generally healthier than those dependent on a handful of leaders.
“Higher yields do raise the hurdle for valuations, but they may also reflect firmer growth and improving productivity, rather than inflation alone.”
Harbour said a solid New Zealand earnings season provided cause for some confidence on select company prospects, although there was little evidence of a broad domestic recovery.
Balance sheets generally remained sound and dividend announcements were supportive.
Management guidance was still conservative, reflecting mixed activity and wider geopolitical uncertainty.
“With market earnings expectations modest, some of that caution may eventually prove excessive, particularly for businesses already doing the operational work needed to lift returns,” Harbour said.
So are Japan’s
Competition for capital is intensifying, investment giant BlackRock says.
The 10-year Japanese government bond (JGB) yield briefly topped 3% this week for the first time since 1996, while the yen weakened to 160 to the US dollar before rallying.
US inflation data, due early tomorrow morning (NZT) will take centre stage.
“Sticky price pressures could reinforce the global rise in yields we see playing out in Japan,” BlackRock said in a commentary.
“Japan has become a key focus in the global rate reset as competition for capital intensifies.
“JGB yields are surging just as persistent underlying inflation and yen weakness are putting pressure on the Bank of Japan to raise rates faster.”
BlackRock said that matters globally.
“Higher domestic yields could draw capital home, weighing on demand for US debt at a time of rising global borrowing needs,” it said.
“Japan now offers a meaningful risk-free yield: the 10-year JGB yield is up roughly 90 basis points this year and briefly topped 3%, while the 30-year has hit a record 4.18%.”
BlackRock said Japan’s economic backdrop warranted tighter policy as underlying inflation persisted and wages rose.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
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