Investment trends you must not miss

From falling mining investment to the slowing housing boom, here are the key trends affecting our market now.

Summary: The Australian market looks set to be affected by a number of key trends, including an anticipated hit to GDP as a result of falling mining investment, slowing of the housing boom, and a softened market due to this year’s capital raisings from the big banks and companies like Santos.

Key take out: Investors should continue to pitch their equity levels in a way that they are comfortable with. Those who haven’t done so should review their decisions during any worthwhile January rally.

Key beneficiaries: General Investors. Category: Shares.

Together, let’s try and make some sense of the current share market trends. No one is going to get it right, but I hope this commentary will assist you in understanding at least some of the forces that are dominating our markets at the moment.

A fragile outlook for GDP

We will start with overseas trends. It’s 'London to a Brick' that the Federal Reserve will raise interest rates later this month and if that proves to be wrong they will certainly raise them at their first meeting in the new year. The global investment traders are trying to adjust their positions to that impending reality and so you are seeing crazy trends like a rush to US bonds as people worry about equities. They’re seeking safety from this new eventuality given the likely rise in the US dollar as US interest rates increase.

In normal situations, given the fall in commodities, which has been created by oversupply, massive shorting (particularly in oil) and the looming US rate rise the Australian dollar would fall much more sharply than we have so far seen. But it’s held up by a number of substantial asset sales to overseas buyers and that seems to be maintaining our currency at levels that are higher than would normally take place in such a situation. In addition there is a wave of optimism about the Australian economy which also helps the local currency currently trading around $US0.72 cents.

But those who look deeper are worried that the Australian gross domestic product is signalling a tougher outcome. The last set of figures were boosted by the volume of iron ore exports that may or may not be sustainable, given the problems of Chinese steel makers.

In terms of value of exports, (not measured by the GDP) iron ore prices and LNG prices keep falling and our GDP is about to be hit much harder by further and larger falls in mining investment. The current housing investment boom has so far offset most of the mining decline but non-housing investment is not increasing. Housing alone is not big enough to compensate for the mining decline.

And as I explain below, dwelling investment looks set for a problem. Accordingly, we could have some nasty GDP figures during 2016.

Joe Hockey's biggest mistake

Joe Hockey is as nice a person in politics as you can find but, as Treasurer, he was not a long-term thinker. He responded to cries in his immediate electorate and he changed the rules for significant investor visas, which have been a huge driver of the Australian economy. It’s true that a lot of the money went into dwellings, but the latest Turnbull innovation initiatives would have encouraged more of the money outside of property. Instead Hockey applied the heavy hand to visas so the numbers have slumped from the vicinity of 800 a year to token levels. That has taken away many billions in overseas investment and population growth.

Therefore, partly thanks to the former Treasurer, our treasury is now forecasting even lower GDP growth in the years ahead because our rate of migration is falling. An important test of a Turnbull government will be whether it reverses the Hockey mistake. As you will see below Hockey’s mistake is contributing to the weakness in our share market.

Sydney's housing slowdown

Sydney is where the majority of share analysts live and so their opinions are often largely based on what they experience in Australia’s largest city, albeit that our second largest city Melbourne has almost the same population. (This often leads them to the wrong conclusions but that is another subject.)

At the moment Sydney is experiencing a rather nasty real estate situation. Local councils are starting to run short of money and have discovered their reluctance to approve new development projects is costing them money that they now realise they cannot raise more money via rates. So we are starting to see a substantial increase in the number of NSW building approvals.

At the same time the auction clearance rates in Sydney have been decimated from levels close to 90 per cent to the mid 50 per cent level, which is a big fall in a short time. And so we have a looming rise in supply and a fall in demand. That decline is concentrated in the areas of the city where Chinese are not buyers. So it will be serious decline in substantial parts of Sydney, although a collapse is not expected.

Nevertheless given the desire of councils to generate revenue, the supply and demand situation could get worst particularly as the visa cessation is being compounded by New Zealanders leaving Sydney and going home because jobs are hard to find. In Melbourne new approvals are now harder to get but there is still a substantial lift in supply in the pipeline. In the outer suburbs prices are considerably lower than Sydney so they are attracting people from all over the country.

Concerns over industrial property

Self-managed super funds around the country, desperate for yields, are buying small industrial properties on yields around 5 per cent — that’s too low in my view, given the risks. Accordingly this is a very dangerous investment strategy and I hope not too many Eureka readers are involved in it.

The combination of all these events and particularly the possibility of a correction in the dwelling market has led to a historic declaration by the Commonwealth Bank to its private clients that it is advocating lower exposure to the Australian industrial property market, including listed trusts and also the Australian share market.

CBA does not advocate a drastic reduction but merely a safety precaution in case the trends outlined above become nastier than expected. The CBA points out that during the last decade Australia has been boosted by an “unsustainable” mining investment boom and then an “unsustainable” dwelling investment boom. That creates long-term danger. That declaration by the CBA was only published in Business Spectator, but when it was revealed it naturally softened the Australian share market.

As it happens the Australian share market would have been softened anyway because we have seen an avalanche of capital raisings from our big banks, and separately capital raisings from the likes of Santos, which have turned sour. That has left a very nasty taste. Any Australian company that did not raise capital in the last six to 12 months will find it much harder in the next six months. Nothing else illustrates that better than the fact that before its Victorian Western distributor announcement, Transurban rights in the institutional book build got as high as 50 cents but traded as low as 10 cents when exposed to the retail market.

One last thing

The Christmas and New Year period is normally a good time for share markets. Traditionally we are told to be aware of the Ides of March. All I can do is fall back on what I have been telling Eureka readers for most of 2015 – pitch your equity levels in a way that you are comfortable with. Those that have taken this advice won’t need to worry about the fact that the Commonwealth Bank is now advocating higher exposure to interest bearing securities and overseas shares.

Those that have not taken that step should do so in any worthwhile January rally. Australia might be a great country but there is a lot of adjustment ahead and our corporations will also need to adjust to an environment where they must be much more aware of disruptive technology based strategies and how they need to adapt. Indeed that is why the Commonwealth Bank’s decision to invest more strongly in technology is a good sign from our largest company. 

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