Last week in the market was…kind of boring.
There was no follow-through from the big day the Friday before when the Aussie market jumped nearly 3%.
However, I picked up a few clues when it comes to Aussie housing!
One of those clues came via Aussie mortgage lender Resimac Group [ASX:RMC].
This is a quality business that I’ve followed for a long time.
Resimac came out last week with its trading update for the first half of the new financial year.
The news was flat at best. Its profit, though healthy, is down on the previous corresponding period.
No surprise there. Housing loans have cooled down from the 2020 boom.
What was interesting was the market’s reaction to the announcement.
There wasn’t a sharp move down in the price.
Here’s what I mean…
When companies release a downgrade in earnings, it can often come as a surprise to the market.
When that happens, the response is lightning fast…and viciously to the downside.
However, what’s clear from the Resimac reaction is that the market has already priced in the housing slowdown into the stock.
Resimac is down 65% from its February 2021 high.
That’s an extraordinarily brutal sell down. The stock now trades on a Price-to-Earnings ratio of around four. That’s a level I did not imagine it would hit.
What’s also of interest is that RMC is angling to diversify its business into ‘asset finance’ as well as its current mortgage business.
That gives it a growth angle that, to me, looks unappreciated right now.
Asset finance, and business lending, in general, is quite strong in Australia at the moment.
Some other small-cap stocks that are involved in this market are Money3 Corporation [ASX:MNY] and Pepper Money [ASX:PPM].
Both are well down off their highs too.
What’s hanging over them is the outlook for interest rates.
However, my analysis suggests that this is now priced into a lot of rate-sensitive stocks.
Select real estate investment trusts (REITs) have been beaten up over the last 12 months and are also looking juicy too.
But aren’t rates destined to keep going up?
Not so fast…
Inflation could be cooling off already
Certainly, central bankers keep prattling on about rate rises.
The market says otherwise.
Here’s how we know…the yield on the 10-year Treasury bond in the US has gone down in the last few weeks.
It peaked over 4% in October.
It’s now around 3.82%.
Longer-term bonds contain information about inflation expectations and growth.
Right now, the market is pricing in less inflationary pressure and/or expected growth.
That brings us to crude oil too…
Brent crude, the global benchmark, has pulled back to US$87 a barrel.
That’s still pretty high. But theoretically, it should be rising into December.
Why so?
The cap on Russian oil is due to come in next month. Many believe this would drive crude oil back toward US$125 a barrel.
Something doesn’t square here considering the war in Ukraine remains unresolved and Russian oil could be off the radar for a lot longer.
The market also expects US strategic reserve sales to stop after the midterm elections. They may still do.
Why is crude oil going backwards?
Your guess is as good as mine…but I suspect higher interest rates are eating into demand.
For our purposes today, a weaker crude oil price keeps inflation and inflationary expectations in check.
What am I getting at?
The central banks are (arguably) getting it wrong again.
Just as they missed the inflationary outbreak, they’re likely guiding the Average Joe to expect higher rate rises than could eventuate.
That would mean many rate-sensitive stocks could be presenting a nice buying opportunity.
There are no guarantees with this line of thinking. But it’s a possibility.
I wonder, too, if this is what the gold sector is sniffing out. The gold stocks rallied hard the other week.
My Evolution Mining [ASX:EVN] and Regis Resources [ASX:RRL] stocks have held on to most of the gain so far too.
Less rate hikes are a tailwind for gold.
I know my colleague James Cooper sees opportunity here. James is a trained geologist and the latest edition to the team.
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Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
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