Investing in a post-mining boom market

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The Reserve Bank of Australia’s (RBA) decision to cut interest rates this week is great news for the long downtrodden non-mining sectors of the economy. The RBA is effectively acknowledging that the mining boom will start petering out by late next year and the economy will need a few new growth drivers to take its place.

Indeed, the RBA’s intentions seemed pretty clear from its post-meeting policy statement. The RBA acknowledged “the peak in resource investment is likely to occur next year, and may be at a lower level than earlier expected. As this peak approaches it will be important that the forecast strengthening in some other components of demand starts to occur.”

Investing in housing

Where better to look than the non-mining sectors, and interest rate sensitive sectors such as housing construction in particular.

Being less subject to international competition, the housing construction sector is less hostage to the fortunes of the Australian dollar – and more sensitive to interest rates. It means that if the Australian dollar stays uncomfortably high over the coming year – due, for example, to our new status as a ‘safe haven’ investment destination – we might still rely on more home building to absorb the workers being shed by the mining sector.

Housing outlook

Home building approvals have been on a steady slide since late 2009, though there have been tentative signs of stabilisation in recent months. Approvals for new apartments surged over May and June, fell back to earth in July (partly due to the ending of State Government incentives) and rose again in August. But there is more new work in the pipeline. Approvals for (less volatile) single family homes appear to have bottomed in April and have been trending higher for the past three months following 29 months of decline.

Home lending is still fairly flat, with first home buyers still a declining share of the market in recent months and investor interest fairly subdued. But there has been a lift in interest by established home owners, which is also reflected in a firming in auction clearance rates and stabilisation in home prices in recent months. Some measures suggest home prices have started to rise following the RBA’s earlier rate cuts in May and June this year.

Note, moreover, that the subdued level of home building in recent years has come despite still solid levels of underlying demand. The relative shortage of homes has been reflected in tightening rental markets and rising rents.

With mortgage interest rates a bit below their long-run average and house prices sliding relative to household incomes in the past two years, home affordability is improving.

Companies in the sector

If the RBA continues to cut interest rates, the stage could be set for a belated upturn in housing construction, which would benefit Australia’s listed home material stocks such as Boral (BLD), Brickworks (BKW), James Hardie (JHX), Adelaide Brighton (ABC) and Alesco (ALS). Stockland (SGP) and AV Jennings (AVJ) are engaged in the construction of residential properties more directly.

Among these companies, the share prices of BKW, CSR, SGP and AVJ in particular have had smaller share prices gains to date and might be poised to benefit from a stronger upturn in the sector. Of course, it would be nice if investors could gain broad diversified exposure to this investment theme through, say, a pure homes builders exchange traded fund (ETF) – but one doesn’t yet exist for the Australian market. The closest we can get is to invest in the industrials sector ETF (IDD), which includes exposure to construction and building material stocks.

Easing pressure on banks

And of course, lower interest rates and a pick-up in home lending also bodes well for Australia’s much larger banking sector – which has been suffering through quite weak credit growth following the global financial crisis.

Bank profits have improved in recent years in line with reduced bad debt provisions as the economy recovered from the GFC, but sustaining decent profits in the next few years will be a challenge and crucially dependant on a pick-up in credit growth.

History suggests, however, that the financial sector – and banks in particular – tend to do well in an easing interest rate environment.

Finance stocks

Investors seeking broad exposure to the financial sector have a number of ETF options to choose from, such as State Street’s financials-excluding listed property (OZF). BetaShares also has an ETF covering the whole financial sector, including listed property (QFN).

Retailers

Last but not least, should house prices start to rise in earnest in the coming year, it would bode well for household confidence and consumer spending – which might even give downtrodden retailing stocks a belated lift.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Anyone should consider the appropriateness of the information in regards to their circumstances.

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