Why are property prices surging as rates are rising?

Montgomery Investment Management

November 2023

In the thriving metropolises of Australia, the real estate horizon is gleaming brighter than ever. House prices have surpassed previous highs, putting a final nail in the coffin of those pessimistic forecasters who predicted 25-30 per cent declines.

The latest figures show a surprising twist in Australia's property market, as the largest and costliest city shatters its previous real estate records. Across the nation, we're seeing a similar trend, with the PropTrack home price index indicating a national median home value increase of 0.36 per cent in October, achieving a new high.

Sydney, once the face of declining values due to higher interest rates, has made a dramatic comeback. Home prices in the city are at an all-time high, with the median dwelling value reaching $1.07 million, marking a steady 11-month rise and a commendable annual rise of about 7.5 per cent.

Other capitals like Brisbane, Perth, and Adelaide have also hit record values, defying earlier expectations. Even as interest rates have climbed, these cities have witnessed robust growth, thanks to a mix of factors, including renewed migration, a limited supply of stock and tight rental markets.

Though Melbourne's and Hobart's prices are yet to surpass their previous highs, they're on an upward trajectory, while Perth boasts the most vigorous annual price surge, and Adelaide impressive growth year-on-year. Brisbane shares the spotlight with Sydney, with home values at all-time highs.

A month ago, in a blog post entitled Don't Sell! House Prices Must Go Up, I wrote; "At the same time the population is surging (thanks to government policy), a downturn in housing construction has gripped the country. Australia is witnessing a steep decline in new home sales, and ...the Housing Industry Association was recently reported to be predicting a slump in construction activity by 2024, intensifying existing housing shortages and making homeownership unattainable for many Australians."

One month in since that blog was written, and prices are fast reflecting those circumstances.

And while there's no shortage of real estate agents willing to predict what property prices will do next, you can put them all away. A year 11 business studies student can tell you property prices have to rise, or at least remain elevated if they have already risen. And that's because when demand rises (immigration) and supply falls (construction has slumped) prices can only go one way.

So, what's ahead for home prices? While the threat of inflation could prompt further rate rises, the ongoing housing shortage is likely to offset keeping property prices resilient.

In essence, the sustained rise in property values across most of Australia's cities prompts a reflection: were the property bears too quick to predict doom? Current trends suggest they might have underestimated the market's resilience.

Author: Roger Montgomery

Funds operated by this manager:

Montgomery (Private) Fund, Montgomery Small Companies Fund, The Montgomery Fund

Why Europe is the region leading sovereign green

bond issuance and what we expect for the last three

Ardea Investment Management

November 2023

Funds operated by this manager:

Important Information

This material has been prepared by Ardea Investment Management Pty Limited (Ardea) (ABN 50 132 902 722). Ardea is the holder of an Australian financial services licence AFSL 329 828 and is regulated under the laws of Australia.
This document does not relate to any financial or investment product or service and does not constitute or form part of any offer to sell, or any solicitation of any offer to subscribe or interests and the information provided is intended to be general in nature only. This should not form the basis of, or be relied upon for the purpose of, any investment decision. This document is not available to retail investors as defined under local laws.
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Investment Insights: The ups, the downs,

and the future of the economic cycle

Touchstone Asset Management

November 2023

This article looks at some of the current challenges faced by the consumer market and explores macroeconomic trends affecting the market.

As primarily bottom-up investors, we can often get an edge by talking to a company's customers, suppliers, and management teams to assess quality - which is not always done well in the market. And this bottom-up work often leads to the formation of strong top-down views. For example, in 2021 we were confident that inflation was strengthening and would come in above market expectations and lead to higher interest rates. Now, our view is that inflation has peaked, but will remain elevated for some time.

Along with inflation and its impact on consumer spending, there's a lot of global macroeconomic volatility impacting the market.

An update on consumer spending

Let's start with a quick recap of the most recent reporting season.

This brought about a wave of volatility in the stock market, with one in every eight stocks experiencing movements of over 10% in response to their results, which is twice the usual average. This period was characterised by price-to-earnings (PE) expansion, explaining much of the market's upward movement. Investors seemed willing to look through some of the soft results by cyclical companies and buy them regardless, leading to PE re-rating. But they also sold defensives that had earnings misses - which could be seen in the earnings revisions. The average earnings upgrade was only 2.7%, and the average downgrade was around 9%.

The reporting season proved to be a tough one for consumer stocks, marked as the worst in 13 years. More than half of consumer companies downgraded their earnings by over 10%. Several factors played a role in this underperformance, as we had expected.

A significant part of the impact can be attributed to the peak effect of the transition from fixed to variable mortgage rates. Additionally, the phase-out of low and middle-income tax offsets, which provided households with tax refunds, created headwinds. As households steadily deplete their savings buffers, the effects rippled through to earnings. The struggle was evident not just in the earnings reports, but also in high-frequency retail spending data from Kepler, which showed a drop as steep as 12% year-on-year and real per capita consumption plummeting by as much as -5%; an unprecedented decline.

In terms of categories, electricals were particularly weak, but there were some doing quite well, such as those that thrive in good weather conditions (e.g. Wesfarmers, thanks to Bunnings' results).

Inflation is staying high

While inflation may have peaked, it is expected to remain elevated for some time across the globe.

We are particularly concerned about the situation in the US, where fiscal spending continues at an unsustainable rate, and is contributing to higher bond yields. While those yields are rising, it is not solely due to inflation. There's a shortage of demand for bonds, which propels interest rates upward.

The current conflict in the Middle East, while socially devastating, also has strong financial impacts. Tensions lead to higher oil prices globally, further increasing cost of living. We were already positive on oil because we thought supply would be under pressure, but again, that just gives us confidence with a higher oil price that inflation will remain elevated.

So, what does this mean for Australia?

We believe wages growth will remain strong here, because of our relatively rigid wage setting mechanism. We also believe energy prices are expected to remain high, so we're in a similar situation where inflation, while it may have peaked out, should remain quite high. And as we saw recently, the RBA implemented another rate hike.

At the household level, the pressure is at its peak, with the transition from fixed to variable mortgages and the depletion of savings buffers taking its toll. Approximately 60% of households have already exhausted their savings, a figure expected to rise to 80% by the year's end.

Overall, as we expected, we saw a per capita recession but not an outright recession, and we can hopefully look forward to better conditions as we move through 2024.

A bit on banks

For a while, we've held the view that the banks' margins were too high and would come down. The recent  reporting season appeared to confirm this view, with pre-provision operating profits broadly disappointing as bank margins were squeezed. Offsetting this, credit costs continued to surprise positively, resulting in earnings that mostly met expectations.

We still see a lot of competition in the sector and rising costs impacting in the year ahead. We also forecast an increase in bad debts, as losses begin to normalise from its current very low levels. This will likely result in lower earnings for the sector over the next 12 months.

We have owned NAB, and we think that's the pick of the bunch - relatively less exposed to some of the concerns we have and looks more reasonable. But if anything, across our portfolio, we make a lot of being index unaware, and this is a great time where we think there's more opportunity out of sight of the major sectors of banks and resources, into some of the other areas where we see more quality on offer at better value.

The end is near (for the economic cycle)

Despite the challenges, there are still opportunities in the market for investors who choose wisely. And while it's felt like a long, volatile cycle, we are nearer to the end than the beginning.

For some time, we've been talking about our expectations for earnings downgrades. In mid-late 2022, the market had 12 months forward EPS growth of around plus 8%. That's fallen by 14%. Expectations are now for EPS to decline in 2024 by around -6%.

Notably, the downgrades have been largely due to resources. Industrials have actually been surprisingly resilient, so we still think there'll be further modest weakness in earnings, perhaps low to mid-single digit downside. But what will be different is that the downgrades are likely to come from the industrials.

How we're positioning the portfolio

Our approach is to own the higher quality cyclicals - preferably those that have used the period of weakness over the past couple of years to improve their businesses, in anticipation of rates peaking and the next cycle commencing. For example, we invested in James Hardie this year, which has been a good call. While we knew the company could be impacted by higher US interest rates, those rates now mean less building. So, if anything, there's more of an undersupply of housing in the US as we move through the next cycle - a little bit of pain now, but potentially more upside later.

Another sector we are overweight in is energy, with companies like Ampol showing strong performance due to our positive outlook on oil.

There's been a lot of talk recently about the impact of GLP-1 drugs like Ozempic on healthcare stocks. It's meant that some of the healthcare stocks, which are in the bucket of defensives and are high quality companies, are now particularly cheap. We think in some instances they've been dealt with too harshly. In the longer term, we don't think health care stocks will be impacted by GLP-1 drugs, and therefore, oddly enough, it's actually the defensives that are quite often looking attractive now.

CSL, for example, is the top ranked stock in our universe on our quality value matrix. Even if we take the extreme view as to the uptake and adherence to all correct protocols by people that take GLP-1 drugs, CSL may see some competition in parts of its portfolio, but there'll be minimal impact. At a recent investor day, CSL's management forecasted double-digit earnings growth, with increasing return on capital. So, there's still positive feedback from the industry.

Overall, the market looks relatively reasonably valued, perhaps even marginally overvalued. So, when you put all that together, given we know the market will look through the last part of the earnings downgrades, we're now starting to think about what we want to own for the next cycle.

Funds operated by this manager:

Touchstone Index Unaware Fund

The content contained in this audio represents the opinions of the speakers. The speakers may hold either long or short positions in securities of various companies discussed in the audio. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely as an avenue for the speakers to express their personal views on investing and for the entertainment of the listener.

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ESG in 10: Episode 12 -

What is AMR and why is it important for Investors?

Fidante Partners

November 2023

Funds operated by this manager:

On the road: is India starting to live up to its promise?

abrdn

November 2023

Funds operated by this manager:

Aberdeen Standard Actively Hedged International Equities Fund, Aberdeen Standard Asian Opportunities Fund, Aberdeen Standard Australian Small Companies Fund, Aberdeen Standard Emerging Opportunities Fund, Aberdeen Standard Ex-20 Australian Equities Fund (Class A), Aberdeen Standard Focused Sustainable Australian Equity Fund, Aberdeen Standard Fully Hedged International Equities Fund, Aberdeen Standard Global Absolute Return Strategies Fund, Aberdeen Standard Global Corporate Bond Fund, Aberdeen Standard International Equity Fund, Aberdeen Standard Multi Asset Real Return Fund, Aberdeen Standard Multi-Asset Income Fund

10k Words

Equitable Investors

November 2023

November Edition

Funds operated by this manager:

Equitable Investors Dragonfly Fund

Disclaimer

Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.

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This blog is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The information on this blog does not constitute a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Although this material is based upon information that Equitable Investors considers reliable and endeavours to keep current, Equitable Investors does not assure that this material is accurate, current or complete, and it should not be relied upon as such. Any opinions expressed on this blog may change as subsequent conditions vary.

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Acceleration of innovation now spells danger for investors

Insync Fund Managers

November 2023

A new app, 'Threads' built by Instagram, which enables the sharing of text updates and joining public conversations, recently reached 100 million users within an astonishing five days.

'This is a powerful demonstration of the lightning speed at which innovation is accelerating,' says Insync Funds Management (Insync)'s Head of Strategy and Distribution, Grant Pearson. 'Make no mistake, the frantic pace of change now spells danger for investors.'

For context, Facebook took 4.5 years to reach 100 million users, Instagram took 2.5 years, TikTok achieved it in nine months, and Chat GPT took two months.

'The reason this means big trouble for investors is that they could be in the right company today and, as little as weeks later, be in the wrong company,' Mr Pearson says.

The pace of innovation does not just affect pure technology plays.

'All companies could be affected as they all rely on technology of some sort,' he says. 'If their competition embraces new technology better and faster, a dominant company today may find its revenues and profits under immediate threat. And let's not forget brand new competitors for firms that technology has opened the gates to.'

Mr Pearson says that while in the past investors had months or even years to discover an emerging technological breakthrough, assess it, seek views, and then act; now they have next to no time and the skills required to do it are often outside the investment industry.

'In fact, the average life span of successful businesses is being compressed into less than 10 years duration,' he went on to say. 'This is disruption accelerating at the same time that time frames are compressing.'

Annual increases in computing processing power are now many hundreds of times faster than previous computers which are themselves under five years old.

'Look out further, say six years, and it's even more profound,' he says. 'Google's latest Sycamore Quantum Computer, testing now with operational status by 2029, is an astonishing 241 million times more powerful than today's fastest supercomputers!'

In other words, Sycamore can solve in seconds a problem that takes today's fastest supercomputer 47 years.

'This first iteration of Sycamore is only the 'Model T' of what is to come,' Mr Pearson says. 'The alarming thing for the investment community is that we are only at the very beginning of this acceleration. It is akin to sitting in a roller coaster as it has just tipped into its near vertical first run.'

Couple this extraordinary increase in power with the advances in AI and Mr Pearson says gargantuan change is afoot, change that will revolutionise our world and turn most industries upside down, along with investor returns.

'Fund managers and researchers need to quickly create robust means to assess and counter the acceleration of technological change and shrinking time frames, to reduce the threats to returns, as well as better understand which companies will deliver the decent performances of tomorrow,' he says.

'Our industry has a reputation for being slow to change, with egos routinely getting in the way of adapting. Investors need to check carefully that their fund managers are very clear as to how these factors impact their investment processes if they are not to be blindsided and saddled with disappointing returns.'

Funds operated by this manager:

Insync Global Capital Aware Fund, Insync Global Quality Equity Fund

Disclaimer
Equity Trustees Limited ("EQT") (ABN 46 004 031 298), AFSL 240975, is the Responsible Entity for the Insync Global Quality Fund and the Insync Global Capital Aware Fund. EQT is a subsidiary of EQT Holdings Limited (ABN 22 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT). This information has been prepared by Insync Funds Management Pty Ltd (ABN 29 125 092 677, AFSL 322891) ("Insync"), to provide you with general information only. In preparing this information, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. Neither Insync, EQT nor any of its related parties, their employees or directors, provide and warranty of accuracy or reliability in relation to such information or accepts any liability to any person who relies on it. Past performance should not be taken as an indicator of future performance. You should obtain a copy of the Product Disclosure Statement before making a decision about whether to invest in this product.

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Where nature meets business: The TNFD framework.

Tyndall Asset Management

October 2022

Funds operated by this manager:

Tyndall Australian Share Concentrated Fund, Tyndall Australian Share Income Fund, Tyndall Australian Share Wholesale Fund