Good afternoon,

ASX 200 is down about 40bps on this time last week, trading currently at 6453. Consumer staples (WOW -7%) energy (BPT -8%, WOR -7.4%), utilities and technology stocks the notable underperformers, whilst REIT’s (SGP +8%, VCX +3.7%, MGR +3.5%) and discretionary (SUL +7%, ALL +6.6%) stocks led the market.

The rally in some of the much-unloved REIT’s, the building materials companies (CSR, ABC, GWA, BKW, FBU, BLD et al) and to a lesser extent, the banks is all about the election, the seemingly inevitable rate cut (or two) later this year and perhaps, the bottom of the property market in Sydney. Below Macquarie show the effect of rate cuts/rises on the returns of the building materials sector:

Macquarie like James Hardie (JHX) on 17x with a $23.80 price target (ahead of the market $20.95), last trade $18.10 and CSR (CSR), 12.5x, $4.70 price target (vs market $3.45), last trade $4.09.

Interestingly, after the recent rally, it’s only Boral (BLD) trading below its 5-year median premium to the ASX 200 materials index, currently at a 10% discount to the index when it historically has traded at a 10% premium. Boral is buy rated with a $5.62 consensus price target, last trade, $5.19.

Is this the bottom of the housing market?
It seems like the rates of decline on the east coast have at least slowed, and apparently, there’s been a renewed sense of confidence post-election. In terms of clearance rates, they are definitely up!

As per the below chart, prices could start rising again as soon as July 2019.

However…
Whilst a cut in rates (or two, or three) might slow the decline, it’s wages that support (at least now) your application for a mortgage. If you assume the cost of living is flat or rising, the only way to increase your capacity to borrow is to increase your income or for the banks to take more risk by reducing the serviceability requirements. So, rather than think like a seller, think like a buyer. Is my ability to pay more for this house getting larger or smaller?

Well, I don’t think it’s getting any smaller…

Regulation of lending practices appears over (with APRA easing off on the 7% interest rate test), though ‘easy credit’ is unlikely (particular with the banks facing class actions for ‘irresponsible lending’…. moronic greed, but nonetheless.)
and wages aren’t going up any time soon.
building approvals falling off a cliff (less construction jobs),
mining in the “production” phase vs the employment-heavy construction phase
and the services sector is very much linked to consumption which is linked to the aging population (get old, spend less… more old people spending less, more young people earning less)
technological advancement is deflationary

So, all in all, there’s probably going to be more of the same. Prices down to flat on a good day, though maybe the declines slow in Melbourne and Sydney as history tells us, these things don’t go on forever.

In terms of stocks, I wouldn’t be getting carried away with building/property/banking exposure. I’ll be staying cautious with my allocations, with bias for quality (RWC & JHX) & value (CSR, BLD). I’d also favour the more stable “renovation” sector (GWA, REH) over the flat our construction stocks (BKW, ABC, FBU). I think if you want government infrastructure spending upside there’s better ways to pay this through the contractors (CIM, LLC et al)


A few ideas
One of my colleagues asked me to screen the market based on analyst forecasts. What I did was take a look at changes in consensus price targets, sales estimates and profit estimates independently and based on the historical relationship, predict future returns.

I found the stocks with above average deviation from my prediction for each metric, focusing on stocks with above average ‘error’ across at least 2 metrics (I’ve lost you, haven’t I?)

Anyway, of those at least 2 metrics flashing “green/cheap,” I then compared the change in recommendations over that period, sorting by the most positive changes. Here are the stocks with the last price (when I did this last week), the consensus PT, implied 12m expected return, average rating (1 = buy, 3 = sell) and the number of analysts covering the stock (minimum allowed in the test is 5).

What’s this tell us?

Well, it’s a list of domestic cyclicals (ORA, SVW, OML) + offshore cyclicals (ALL, ANN). Most with polarising analyst opinion that’s kinda drifting positive… I’ll keep an eye on this list in the next few weeks and report back (ALL just got a big upgrade on Friday so I reckon I’m onto something!)


Movers & Shakers
Rare earths having a moment in the sun… too complex for a simple man from Scarborough, leave that to those who pretend to understand.

Otherwise, its a list of names we just talked about plus some consumer stuff (interest rates going down, consumer bump… I don’t think so!)

ALS (ALQ) had a disappointing result, though it’s a quality business with a sustainable moat and plenty of upsides to exploit long term in my opinion. Otherwise, it’s a bag of energy & tech/high growth stocks which I assume are being offloaded due to Trump/China trade war risk.

Have a good week,
LL