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Economic headwinds to weigh on Genworth

Tags: Genworth MI

The Canadian housing market remains the envy of the world, as prices continue to trend higher, while economic growth and real estate markets in other developed economies grind to a halt. But Canaccord Genuity says the economic outlook will begin to weigh on Canada's real estate market, and subsequently, on Genworth MI (MIC-T), the country's largest private mortgage insurance provider.

"Looking ahead, we believe that slowing economic growth and consumer sentiment has the potential to weigh on Genworth's new business volumes, and in turn, future earnings," analyst Evan Minsky said in a report to clients on Friday.

"While interest rates are generally expected to remain unchanged into next year, we believe that slowing economic growth and consumer sentiment has the potential to weigh on Genworth's new business volume, and in turn, future earnings."

Minsky lowered his price target by 8 percent to $28 from $30.50, but maintained his 'buy' recommendation on the stock.

He also warned that recent government efforts to tame Canada's hot housing market will drag on Genworth's share price.

"Government changes to mortgage insurance rules effective mid-March 2011…may be having two effects on housing activity," he said. "In order to qualify for insurance, the rules may: (1) force first-time homebuyers to save a larger down payment, postponing purchase, or (2) price some buyers out of higher levels of the market, driving them to buy less costly properties. NPW [Net Premiums Written] growth is viewed as critical to Genworth's long term earnings, and we believe a slowdown would therefore impact MIC shares."

While Genworth's shares has fallen nearly 26 percent in 2011, the company's attractive dividend yield has helped maintain investors' interest.

"We continue to recommend [Genworth MI] to yield and value investors given the current dividend yield of 5.1 percent and expected upside over the forecast period," Minsky said in his note.

Minsky's note come on the heels of another report on a potential slowdown in Canada's housing market. Bank of America Merrill Lynch this week warned that a major supply glut in Toronto's condo market could push prices down by as much as 15 percent.

"Completions of Toronto apartment units [condos] are now at the highest level in almost four decades," Ryan Bohren, an economist at Bank of America Merrill Lynch, said in the report. "Additionally, the number of units under construction is at record levels; implying completions are unlikely to trend lower anytime soon."

"Even if we assume 50 percent of Toronto's household formation is now destined for condo purchase or rental that is still over 3 years of inventories," he says. "As these units are completed the market will likely have an increasingly hard time absorbing them, leading to higher vacancies and downward pressure on prices." CTV Two CTV News CTV News Channel BNN - Business News Network CP24