The US mid-term elections did not deliver the 'blue tsunami' the Democrats hoped for. Exit interviews showed much Trump support comes from the strength of the economy and job creation, but in this exclusive summary, Hamish Douglass explains the probability that the Trump stimulus comes at a cost.
Not a time for bravery in apartment investing
But first, somewhere in the blur of doctors' waiting rooms visited in the last week was 15 minutes watching The Block. Yuk, like instant coffee. But even with the sound off and having barely watched the show before, it was easy to understand the hype. An apartment was auctioned for $430,000 above reserve, while people in the studio (who, I assume by their reaction to the rising price, keep the money) jumped up and down and hugged each other. How many of the millions watching think they can do the same thing with renovations done by unskilled people?
The problem is that the property market has quickly changed. Greg Paramor was Managing Director of the property group, Folkestone, until it was recently acquired by Charter Hall. He is a past President of the Property Council of Australia. In a private talk to clients last week, he said:
“When you get an over-exuberant market, it normally ends in tears, and we’re seeing some tears at the present time, particularly in certain parts of the Sydney, Melbourne and Brisbane apartment market ... the people at the coal face who are doing the project marketing to investors say about two months ago, the market just stopped. They say if they dropped the price 20%, nothing would change. There are no buyers out there."
More on Greg's remarks in this property article. CoreLogic tweeted the following chart this week, showing Sydney is off over 8% from its peak (the black line), a faster decline than in any other recent period. Buyers with 20% deposit have already lost half their equity, with more to come. Some recent investors are heading for a lot of pain, even without a major crash.
Source: Tweet by CoreLogic Head of Research, Cameron Kusher.
Comparing the new hybrid issuance
Investors looking for alternatives to term deposits have loaded up on bank hybrids by the billion. Last week, Christopher Joye wrote in the AFR that CBA's new hybrid is cheap. A couple of brokers sent emails to clients showing how other similar hybrids, such as CBAPD and ANZPG, offered better rates. The lesson is not to jump on the new issue but to check market prices. Of course, hybrids have equity-like characteristics, and Banking Day reminded us of the risk when it reported on former PM Kevin Rudd's new memoir released this week. Rudd reveals that a 'first tier' bank was in a near-fatal condition at the height of the GFC. We're all guessing which one! A reminder we have a full hybrid pricing report from NAB/nabtrade each week.
In this edition ...
Hamish Douglass checks the unwelcome market scenarios due to Trump's tax cuts. Investors should consider the risks.
In another exclusive, Hugh Dive provides his annual scorecard on the performance of Australian banks in the last financial year, and looks ahead at the minefields. Then Tim Koroknay says a skilled active manager should not be forced to closely follow an index.
It's difficult to get a firm grip on the growth of roboadvice in Australia, as few robos release their asset numbers. The majority will be forced into different business models other than 'direct to consumer', as some have already discovered. We interview an early starter who pivoted away.
Have you heard of 'Chat 10 Looks 3'? It's one of those influential community movements with a strong and vocal base, and Leisa Bell shows why the finance industry should be listening.
Cuffelinks has been contacted by Tim Wilson MP, Chair of the House Standing Committee's inquiry into refundable franking credits. See his request to our readers for comments.
The latest Listed Investment Company Report from IIR attached below shows how corporate activity has stepped up, as managers with a strong track record seek to take over LICs trading at a discount which have struggled to attract widespread support.
This week's White Paper from Colonial First State Global Asset Management is their 2018 report on responsible investing, including useful case studies and a fresh look at benchmarking, climate change and carbon risk.
(If you missed the comments section on my article last week on European travels, there are some excellent tips on how to make the journey easier).
Graham Hand, Managing Editor
For a PDF version of this week’s newsletter articles, click here.