What do a mortgage insurer, a car yard, and a bank have in common?
They're all heavily exposed to the wealth and spending habits of ordinary Australians.
Genworth Mortgage Insurance Australia (ASX: GMA) writes lenders mortgage insurance (LMI) which insures higher loan to valuation (LVR) ratio mortgages. It's under pressure from both sides; not only has it insured lots of loans to heavily indebted borrowers, but the big banks are increasingly bringing their LMI business in-house. Genworth thus faces the prospect of declining earnings as well as possibly expensive risks if the housing market deteriorates further. I would avoid Genworth today.
AP Eagers Ltd (ASX: APE) is an automotive dealership that sells both new and used cars. Just under half of its sales are in Queensland and the company recently downgraded earnings before re-upgrading them again as new car sales picked up. Although the company remains sensitive to further downturns in automotive sales, AP's financial position appears solid and the company has paid a dividend every year for 60 years. I think that AP Eagers is a buy at the right price.
Westpac Banking Corp (ASX: WBC) is the eponymous bank that will need no introduction. Among its peers, Westpac appears to be the bank that got into property lending the heaviest, and until recently approximately 50% of all its mortgages were interest-only. The business now must convert many of its interest-only loans into principle + interest (P+I) to satisfy regulatory requirements. While Westpac maintains that it has very high serviceability standards on its loans, I would prefer to wait and see how the borrower migration to P+I proceeds before making an investment here.
