A friend’s son recently bought a house. Like many thirtysomethings, he’d almost given up on owning a pricey capital-city property.
The Reserve Bank’s November rate cut changed his mind. With some banks offering four-year fixed-rate loans below 2%, the projected home-loan repayment was less than his rent.
There would never be a better time to buy, he thought. Interest rates are expected to stay low for at least three years, the economy is recovering and he and his partner have jobs.
That same week, a retired colleague called for advice on dividend stocks. With term deposits barely providing a positive return (after inflation), she decided it was time to buy more shares for yield. Her first stop: blue-chip stocks with fully franked dividends.
Yes, a couple of investment anecdotes is hardly the basis for a bullish view. But I’m guessing many more Australians are considering buying a house or investing in the share market. Ultra-low rates reward borrowers and punish savers – and inevitably drive capital into risk assets.
I’m bullish on residential property and Australian equities over the next two years. Of course, much can go wrong given COVID, a fragile global economy and geopolitical risks. Investors should expect bouts of high volatility and a few savage share market corrections along the way.
Much can go right, too. We’ve seen that this month with promising news on COVID vaccines and a favourable US election result (in terms of market sentiment). Australian economic data has beaten market expectation, suggesting the economy could roar back to life next year.
National Australia Bank this week said it believes Australia’s economy can return to pre-COVID levels by end-2021 – a year ahead of NAB’s initial forecast.
And ANZ scrapped its call for a 10% fall in house prices, now expecting gains of 8-12% across the capital cities. That’s strong growth for property at any time, let alone during a pandemic.
Housing reform is another plus. This week, the New South Wales budget proposed a tax overhaul on stamp duty – that dreaded property tax that makes it harder to buy. Finally, a State government has the courage to propose a gradual replacing of stamp duty with a land tax.
Nevertheless, talk of housing or share market booms is premature. Lower population growth, fewer international buyers and tapering of first-home buyer grants will weigh on housing prices. In shares, international border closures and high unemployment will weigh on earnings.
But companies that benefit from housing – property developers, advertising platforms and home-furnishing providers – will have bigger tailwinds in the next few years. So, too, asset managers that benefit from higher investment activity and inflows into managed funds.
Here are two themes to watch and stocks that will benefit:
1. Residential property
Six months ago, a chorus of property bears predicted peak-to-trough falls of up to 30% in house prices thanks to COVID. Yet again, they were wrong. Betting against Australian residential property over the past two decades has been the mother of all bad ideas.
Three quarters of Sydney homes offered sold at auction last week. Melbourne, playing property catch-up because of its lockdown, was just shy of a 75% clearance rate. Higher auction activity is typically a forerunner to rising house prices as more buyers enter the market.
CoreLogic’s much-watched property index showed national property prices rose 0.4% on average in October, after five months of decline.
Better still, the next property recovery can run further before regulations tap the brakes. Rates will stay low for three years, probably longer. Household balance sheets are in better shape and regulators have forced banks to lend more responsibly. The wild excesses that fuel property bubbles will take longer to return this time, compared to previous housing cycles.
The well-run Stockland (SGP) is my pick of the residential property developers. I considered Mirvac Group (MGR), but its higher exposure to office property and apartments was less attractive.
Stockland has three main operations: residential property, retirement villages, and commercial development in retail, office and industrial property. Investors often view Stockland as a residential-property play, but that division is not the main earnings contributor.
Stockland’s FY20 result beat market expectation. The settlement of 5,319 property lots was higher than analysts expected, thanks partly to Federal and State government housing grants. Lower interest rates, higher credit availability and lower house prices drive demand.
Stockland’s retail property held up relatively well during COVID. Its shopping centres have reopened, foot traffic is almost back to pre-COVID level and retail rent collection is improving each quarter (about three quarters of rent is being collected).
The market has two main concerns with Stockland. First, that withdrawal of government housing stimulus will stymie the residential housing recovery. Victoria might introduce housing stimulus in its budget later this month, but that won’t offset less national stimulus.
The second issue is Stockland’s retail assets. The e-commerce boom and lower population growth are a tough backdrop for suburban shopping centres. Pressure on rental incomes and centre valuations will continue until COVID-related trading conditions normalise.
Stockland’s commercial property is another concern, but many of its key assets are high-quality buildings in North Sydney that have a slew of tech companies as tenants.
Overall, the market is too bearish on Stockland. Its share-price gains will be slower from here, but economists have underestimated the residential and retail recoveries. Years of ultra-low rates are a massive tailwind for housing, with or without government grants
Longer term, I like Stockland’s strategy to focus more on industrial property and logistics, which a big winner from e-commerce growth, and master planned communities.
COVID will quicken the move towards more people living, working and recreating in their community, rather than commuting into CBDs. Master planned communities with offices, shopping centres and other facilities will be in higher demand as some economic activity decentralises.
Chart 1: Stockland (SGP)
Source: ASX
2. Wealth managers
Investors are often better off buying shares in listed wealth managers rather than units in their funds. Look how well Magellan Financial Group (MFG) has performed. So, too, Australian Ethical (AEF), a favoured micro-cap stock superbly leveraged to the sustainable-investing boom.
Also true is that top wealth managers get a boost in bull markets from retail fund inflows and rising share markets that boost their assets under management and fees. Retail funds come with higher margins and the money is typically “stickier” as small investors are less likely to leave.
If you believe equities markets have a strong two years ahead, as I do, listed asset managers appeal, particularly after the extent of their sell-off during the early parts of COVID.
Granted, there are many long-term challenges. The rise of passive index funds is taking market share and intensifying fee pressure on active managed funds. Insourcing of investment mandates by super funds is another threat.
Younger investors are increasingly favouring low-cost index funds, robo-advice and other automated platforms, over higher-fee active funds. That’s a shame: active funds management is more relevant than ever in disrupted, volatile share markets.
I considered Magellan Financial Group, Platinum Asset Management (PTM) and Pendal Group (PDL) for this column. Each would have been a worthy inclusion.
Pendal Group looks the best value after a heavy fall over one year. Its fund flows are improving and its new products are getting good traction. Pendal’s push into sustainable investing through Regnan ESG products is a smart move and should drive higher funds inflow in the long term.
Platinum Asset Management has good recovery prospects. Fund underperformance has weighed on the former investment star for the past five years, and its share price.
But Platinum’s contrarian style to buy out-of-favour companies and hold them until valuations normalise should work in its favour in the next few years. Much of its international equities portfolio is exposed to cyclical growth stocks that will benefit from a global economic recovery.
Improving fund performance should drive higher fund inflows and earnings for Platinum in the next few years. But fund outperformance is never certain and fund inflows, particularly from retail investors, take time. Still, Platinum is a quality stock for long-term investors.
Magellan Financial Group remains my pick of the listed asset managers. It is not immune to market pressure of lower-fees and growth in index investing. Maintaining consistent fund outperformance is another challenge.
Magellan delivered an excellent FY20 result in a challenging market and is increasing fund inflows through clever product innovation. The firm is ahead of its competitors in launching listed funds and actively managed Exchange Traded Funds on ASX.
Magellan’s brand is a strength. As share markets rally, more retail capital will seek exposure to global equities and infrastructure. Retail investors will target well-known brands and well-performed funds: areas where Magellan has a competitive advantage.
Retail capital will become a larger contributor to Magellan in the next few years. If any active funds managers in Australia can weather the pressure to reduce fees, offer more funds in a listed format, and innovate, it is Magellan.
Its stock fell from a 52-week high of $74.91 to $30.10 at the peak of the share market sell-off in March and has recovered to $60.63.
Several broking firms have Magellan trading above fair value, but the stock will do better than the market expects over the next 12-18 months as equity markets rally and more retail investors, like the colleague I helped this week, increase their share market exposure.
Chart 2: Magellan Financial Group (MFG)
Source: ASX
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 18 November 2020.
