ASX200 added 0.93% over the week, including today’s 0.66% decline at the time of this. Property & Infrastructure stocks displayed their defensive characteristics as bond yields settled. Healthcare and Materials (both high beta sectors) were the weakest performers.
While on the face of it, utilities had a good week, AusNet’s new debt deal and AGL’s confirmation of guidance at their AGM probably explained their strong performance rather than anything ‘macro’.
What’s going on with the ‘macro’?
Both short and long-term bonds in the US haven’t moved much in the past 12 days or so, despite the equity markets sudden interest. Below is a chart of the significant move in bonds over the past five years. The main interesting points for those who don’t understand this side of the markets yet/still figuring it all out are:
- Yields have been rising, at roughly the same pace since mid-2016
- Before mid-2016, the 10-year bond yield was trending down, while the 2-year bond was trending up, which saw the yield curve flatten dramatically.
- December 2015 was the first Fed rate increase, December 2016 was the second. The Fed had cut rates from 5.25% to 0.25% over the period 2006-2011, before going on hold at 0.25% until December 2015. Point being that market activity lines up with the Fed’s guidance and subsequent action.
The other sector which performed well this week was property. Traditionally defensive as it is correlated to interest rates and the leading store of Australia’s private wealth. Charter Hall (CHC, +5%), SCA Property (SCP +5.8%) the leaders while BWP, ABP, GPT, SCG, GMG, MGR all added at least 3.6%.
If interest rates are going up, why are investors chasing low growth, yield-focused investments with significant headwinds? Those being online shopping for the shopping centres, property prices more generally, squeeze on disposable income from lack of wage inflation, etc.
I’m not exactly sure what the cause of this jump was. Sure, yields blew out a bit. It has seemed since the mid-2016 change in the bond yield/interest rate environment, it’s been a case of buy on a 5.5% yield and sell on a c.5.0% yield – essentially working the standard deviation range – see below chart.
I’m interested in the green uptrend in the “sell” signal. Back in 2016, we wanted the dividend yield on property stocks to fall to 4.6% before we’d swap for cash or another investment. At recent high’s, we were switching at a yield of 5.10%. Despite their recent rally in price, expect that blue line to make new highs. Unless rents can accelerate faster than interest rates, I’d expect prices to come under pressure as bond yields rise and increase the return investors demand from risk assets like property and shares.
…but what about my house?
This leads us naturally into the property market in Australia. While many of you worry about your shares frantically every day, most of my clients have multiples of the value of their share portfolio invested in housing, land and commercial properties. And unfortunately, for the past year property prices have been on the slide, 12 months in a row across the capital cities, now 4% from their peak.
While 4% doesn’t seem like very much when you consider that most investors put down between 5-30% of the value of their property as a deposit, this 4% decline represents a more substantial hit to the equity component of the property’s value.
I read an article from Shane Oliver at AMP Capital which largely covers most of the reasons I think property prices are going to keep falling further. In particular, the change in the interest rate environment discussed above.
Higher global rates put a squeeze on bank lending margins (the money they borrow costs them more, but they have trouble charging you more to borrow from them). This means out-of-cycle rate hikes. Couple that with the renewed focus on lending standards, accurate serviceability reporting and APRA limits on investor lending and you’ve definitely got a tightening credit environment. Additionally, with affordability issues built around flat wages/inequality and you’ve got a considerably bearish outlook for property prices.
Movers & Shakers
Soul Pats (SOL) was the best performing stock of the week, not sure what the reason is there.
Steadfast (SDF) bounced back after the AGM commentary gave the market some short-term comfort that insurance broking isn’t quite dead just yet.
Elsewhere, AGM’s were responsible for the big moves this week, beyond gold stocks which continue to do well on the back of the elevated stock volatility.
Syrah (SYR) continues to have a hard time of it.
The Senate inquiry into “buy now, pay later” saw Afterpay (APT) shares fall (nobody noticed, but APT is down from $23 to $12 or -56%….) Zip Co (Z1P) shares also down from recent highs of $1.25 to $0.95 (-24%) – one thing I’m sure of is Z1P will come out of this inquiry the winner… they’ve got a great, customer-centric product, with a responsible-lending, best-in-class culture. If anything, this inquiry will highlight the difference in the quality of the two businesses.
Flight Centre (FLT) missed expectations with its guidance this morning at it’s AGM, while Boral (BLD) share price has lagged since it’s recent divestment announcement. I reckon BLD is on the improve though; it should pay down a lot of debt over the next 4 or 5 years which eventually will have the double-whammy positive of a better balance sheet and better free cash flow.
Data Exchange Network – Podcast Feature
Due to popular demand and incensent client badgering Jordan and I recorded a podcast all about The Data Exchange Network (DXN, +9.38%) last week. We
Have a good week,