Goodbye January 2023 and thank you. It was far more fun than June 2022.
It was mid-2022 that the Aussie share market really began to panic over what high inflation would do to interest rates, and therefore company earnings in 2023.
And now here we are….and what have we learned?
Those darn Aussie consumers just keep confounding everyone. Yes, I’m talking about you!
The predictions were a spending recession. The complete opposite has happened. Retailers are booming!
We’ve seen enough earnings announcements to be sure on this.
I note very positive releases from JB Hi-Fi, Myer, Super Retail Group, Accent Group, and Michael Hill.
As ever, the question is whether those investors and traders that bought low, now cash in their chips.
The assumption behind this move would be that the next set of results will be hit due to higher interest rates.
Many borrowers in the housing markets are still yet to roll off their fixed rate loans. But that’s not clear cut.
Employment in Australia is strong. Inflation takes up rates, but it also takes up wages. And there are other variables in play here too.
Shipping costs globally are now coming back down after spiking in 2022. The Aussie dollar is strengthening.
That’s important for many retailers because they source so much inventory overseas and incur costs in US dollars.
Your guess is as good as mine about what matters more. But the results from retailers also suggest the big fear over Aussie housing last year was misplaced too.
Consumers wouldn’t be spending big in shops if they were genuinely worried about defaulting on their mortgages.
And we know something else. Retail spending will go long before mortgage payments.
Why mention this?
One of the fears that drove the share market down last year was the idea that the finance sector would face higher defaults.
We haven’t seen that in the same way we haven’t seen retailers smashed either.
The question for the upcoming half-year announcements due in February is: where do these numbers now lie?
Can banks rally even more from this?
It’s possible. ANZ, for example, currently trades on a 7% yield. The scope is there for it to move up from a valuation perspective.
Again, it’s the outlook that matters. The market is sceptical that there’s enough sector volume growth on offer with a weak housing market.
But what if housing starts to bottom out around here?
We know there’s record low vacancy rates. And we also know that Australia’s immigration intake could be a monster 300,000 this financial year.
These two ingredients alone are enough to start firing up the housing market again.
Now here’s the good news…
Property stocks are still, by and large, on the floor from the 2022 bear market. They haven’t rallied up in the same way as retailers recently, or miners.
But I don’t think it will be long before they begin to rumble.
The market is always looking nine months ahead. But occasionally, investors need to glance back as well.
They’ll realise they became too negative in 2022 and the stocks will price in a more moderate outcome.
We’re already seeing inklings of this in the commercial sector via Real Estate Investment Trusts (REITs).
Take this story from the Australian Financial Review (AFR) the other week:
‘Some big-name property stocks could bounce back strongly enough to deliver investors total returns of up to 15 per cent this year, a welcome recovery after rising rates caused havoc for real estate investment trusts last year…
‘With much of the pain priced into property already, and with the rate rising cycle expected to ease by mid-year, analysts are tipping strong gains in the sector, notwithstanding economic uncertainty.’
Personally, I picked up some exposure to REITs last year in my self-managed super fund on the assumption something like this would play out.
On the whole, I probably could’ve been more aggressive and bought into some of the other sectors with bigger potential for capital gains.
But hindsight is 20/20 and at the time I reasoned most of the damage had been inflicted on REITs despite them being fundamentally robust.
I didn’t know the market would recover as strongly as it has, or that iron ore would rally so strongly, either.
Now I see the same opportunity brewing in the housing sector. The market may already be sniffing this out.
One economist cited in the AFR today says he thinks the Reserve Bank of Australia will be the first central bank across the developed world to cut rates, and this year too…to take the pressure off the housing market.
It’s just another reason that last week I allocated about $40,000 to one beaten-up lender as a starter.
I don’t plan to even think about selling for three years, at least. Housing moves in big swings. I’ll keep you posted on how it pans out.
But my favourite idea when it comes to housing is in my ‘Top Five Bargains’ report. That’s still available here. Don’t wait around!
Editor, The Daily Reckoning Australia