Housing slows in November

CoreLogic results for November showed that house price gains continued to soften in November after record gains, increasing by 1.1% at the 5 capital city aggregate level. The largest markets of Sydney (0.90%) and Melbourne (0.59%) pulled down growth, while smaller, more affordable markets on the east coast continued to run hard, Brisbane (incl Gold Coast) surged 2.83% for the month, followed by Adelaide 2.48%.

The investor segment of the market has been strong, while owner occupier activity has started to ease – likely reflecting waning fiscal stimulus and perhaps some would be owner occupiers tapping out as prices have spiralled higher. It’s become extremely difficult for first home buyers to enter the detached housing market without parental assistance. Many cities are now roughly $1 million for a house, requiring a $200,000 deposit plus closing costs (difficult without parental help – or some next level savings habits, white rice diet anyone?).

The outlook for interest rates has become more negative from the perspective of house price gains. Our neighbours (NZ) across the ditch have seen their Central Bank raise interest rates, which signals the punchbowl may be taken away here soon – even though Phil Lowe has indicated rates will not rise to 2024. I found that to be a strange statement to make as it’s basically ceding the Reserve Bank’s mandate over the next couple of years – who knows what could happen to economic conditions in the interim?

On the positive side, supply chain issues and high building costs are supporting house prices. The potential for immigration to return en masse is also another factor many will be looking at in their bull thesis.

Until next time.

How bad was CBA’s September quarter?

Commonwealth Bank (CBA), recently had its shares fall sharply after it announced its 1Q22 trading update. This may have come as a surprise for our largest residential lender amid a continued property boom. After hitting record highs over $110, shares are now trading below $98. A handy discount.

CBA has been performing well out of the CV-19 panic and recently completed a $6b off-market share buyback. What gives?

Cash net profit after tax (NPAT) was around $2.2 billion, 20% higher than 1Q21 (largely meaningless given CV-19 related volatility) and 9% lower than 2H21 quarter average (a more meaningful comparison point). Yes, profits fell quite significantly compared to the first half of calendar 2021.

Lending continued to grow at higher than system multiple (1.2 for home lending and 1.5 for business lending), indicating CBA continues to execute relative to peers. Its CET1 ratio of 12.5% remains healthy (this is a measure of capitalisation).

The big hit to CBA came from net interest rate margin compression (NIM). CBA attributed this to home loan price competition and switching to lower margin fixed rate loans, as well as the continued effect of a low interest rate environment.

Operating performance (operating income less expenses) remained solid, flat on H2 2021 ($6,427m). This certainly wasn’t a disastrous report. However, given the strong share price performance, clearly the market wanted more. I recently posted on how I took some profits on CBA over $105. If it were to fall under $90, I’d definitely be interested in adding again to my position. I think positioning into crypto was a good move for CBA so I’ll be watching closely for more weakness.

Property market rolls on in October

According to CoreLogic, the property market had another strong month in October, increasing by 1.4% at the five capital city index level. This was a continued moderation in growth, yet still very strong at circa 20% annualised growth.

The strongest performers were Brisbane (including Gold Coast) at 2.54%, Hobart and Adelaide (both 2.0%) and Canberra (1.9%). Peth was the weakest performer (-0.1%), followed by Darwin (0.4%) and Melbourne (1.0%). Annual growth rates remain remarkable, with many cities increasing by over 20% over the last year.

Historically speaking price increases of these rapidity have often been followed by corrections (as happened in the GFC and again around 2011 after the GFC-related stimulus was pared back). Interest-rate stimulus is now waning and banks are moving to push up fixed rate offerings. This is likely to cool down the market over time, as many property owners will be currently locked in and only feel the effects when they go to refinance their loan in one, two, three years (or whatever the case may be). But the prospect of higher interest rates is likely to side against continued gains at 20%+ per annum.

In addition, house prices have run very hard relative to wage growth. While there have been a lot of headlines around employees receiving healthier payrises (and it’s true), at a macro level wages growth remains pretty weak. Over the year ending June, the wage price index (WPI) rose by a pretty weak 1.7%. However, annual growth in private sector wages has looked to have bottomed out at 1.2% in the September 2020 quarter and had increased to 1.9% growth to June 2021. The next quarter’s release will be out shortly which will be interesting. I’m expecting to see continued growth in wage gains. Anecdotally some professions are throwing money to obtain talent (e.g. lawyers, consultants, accountants/auditors) while blue collar tradies are in high demand as well.

The prospect of interest rate rises is likely to temper the market. Another uncertainty is over overseas migration as travel starts to begin again. If net overseas migration picks up to pre-CV-19 levels (or exceeds it), that will likely boost the housing market, all else equal. Overall, it’s a complex picture, but price gains look likely to continue to moderate.

Let’s talk China

China has thrown commodity markets a curve ball in the second half of 2021.

Prior, red hot demand for commodities from the world’s largest consumer saw iron ore surge to all-time highs well over US$200/ton. Other industrial commodities (nickel, copper, aluminum etc) were similarly robust. Post CV-19 stimulus and a view to massive renewable investment (net zero shift) had many – myself included – leaning to a stronger for longer commodity narrative.

Then came the slowdown. Chinese authorities wanted to lean against excesses in the steel sector. The direction was to cap steel production at 2020 levels. After a record first half of the year, this meant production had to be reigned in in H2 of the year. And it has. In turn, that has meant less demand for inputs such as iron ore and coking coal. Iron ore supply had started to pick up as well (as expected with sky high prices), so more supply has hit faltering demand, leading to a decimation of prices (circa 60% decline).

Authorities have also seemed to have strengthened their resolve to reign in overdevelopment in the property sector. Evergrande is the most notable example, but there are other highly indebted developers running into genuine strife. Many of us are shocked as we’d been used to authorities running to their aid, thinking that they are too big to fail. However, the risk tolerance has seemed to have increased. There could be some pain ahead if weight is put on a transition away from debt-heavy, commodity-intensive growth to more consumer-led growth. All of this is terrible news for big commodity producers like Australia.

Economic growth has slowed in China to roughly 5% in the September quarter, which in China terms, is weak (the previous quarter was around 8% annualised growth). A faltering property sector, combined with energy shortages (related to coal and a push for cleaner energy) has hit growth hard. So far, authorities have been content to take the hit. The question is how long will they allow things to cool down. It’s all well and good to say clean and sustainable economy, but the reality is a major chunk of China’s economy is based on building, and the upstream and downstream industries. Fixed asset investment comprises around 40% of economic activity. Hitting the brakes will inevitably hurt at some point.

The question is when authorities will flinch. Until they do, it’s going to be a painful time for our commodity producers (BHP, RIO, FMG etc). I’ve regretted being overweight commodities this year (particularly iron ore) and it’s killed my returns relative to market. A few big dividend cheques have not outweighed the capital losses. Now overweight, and unsure of the situation in China, I’m reluctant to keep averaging down. Discretion valour something something.

Until next time.

Portfolio management

A challenge of managing your own share portfolio is knowing when to sell holdings.

We have all had the bad experiences of selling a share to watch it skyrocket it after. I can think of multiple examples, we’re talking going up five times plus since selling. My most recent face plant in this respect was selling Tesla in the first half of 2020, figuring amid the CV-19 recession who would be lashing out on expensive EVs. Well Tesla stock is up about eight times since I sold. Ouch.

That’s part of the game. I’ve also sold stocks that have practically gone to zero after I sold them, a major relief. Knowing when to sell is hard. A common approach is not to sell out fully, for example if a stock doubles, sell half of it (covering your initial investment) and let the rest ride. I wish I’d stuck to that with Tesla. Hindsight is 2020. The downside of that is you can end up with a lot of stocks in your portfolio and over time start to approximate the market, thus removing the potential for outperformance. It’s a delicate balancing act.

When looking at your portfolio, you should be confident that your shares will go up over the next 12 months. Otherwise, there’s no real point being in the stock. Likewise, if the best outcome you can see is being roughly stable (maybe with a few % dividend), again you’d be better of redeploying your capital. A thing to keep in mind with selling positions to rebuy is the transaction costs (brokerage on the sell and the new buy) and the taxation implications (if a share is positive, you generally want to hold for 12 months to get the 50% capital gains tax discount in Australia).

Today I freed up some capital from CBA, selling for $105.12. That’s a handsome price, and I did well out of the stock, buying under $60 in 2020 and at $82 in February of this year. Even from February that’s a 28% increase plus dividend (CBA paid out a $2 dividend quite recently). Why sell? I don’t see the same upside from $105. If all goes well, maybe in 12 months we could be at $120. If the property market turns, we could well head back under $100. It’s no longer a strong buy, it’s a hold in my eyes. And there’s other opportunities out there I want to get my teeth into. Opportunities where I could see 50% share price gains in a year as quite possible. So I freed up some capital. I didn’t sell all. CBA is banking royalty in Australia and has a track record of rewarding shareholders. I think it has a place in a portfolio. But from this price, I’m more hoping for gains than expecting, which is a good sign to think about downsizing the position.

And just in case you think I’m full of it with my buy:

With the freed up capital, I’ve got my eye on a few US stocks which I’m currently researching. Until next time.

Housing update

CoreLogic’s update for September housing prices showed another month of robust growth. The five-city capital index increased by 1.45% to be 19.3% higher over the past year. Hobart (2.3%) and Canberra (2.0%) led the monthly rate of growth. This is feeling like the same monthly update lately! Annual growth ranges from 15% in Melbourne to an insane 27% in Hobart.

Meanwhile, lending pulled back. This looks to be partly related to fading first home buyer stimulus and likely some impact from Lockdowns across the country. It’s not indicative yet of a falling market and overall lending still remains very high by historical standards.

Resource carnage continues

Another day, another nasty sell-off for resource companies.

Year-to share price gains for BHP, Rio Tinto and Fortescue Metals

Last year’s gains for the big three have been eviscerated. FMG was up over 60% from its price a year ago (Sep 2020), while BHP and RIO were both up 40-50%. It’s been a vicious two month sell-off which has left shareholders nursing bruised ribs.

I’ve reinvested my dividends from BHP and RIO into more shares and have bought small parcels recently in all three shares. Buy when there’s blood in the streets, even if it’s your own. I’ll up my shareholding base and hope for brighter days for commodity markets. Interestingly, the miners are at or very near their recent lows despite the iron ore price rising from under US$100/ton to over US$110/ton. That says the sell-off may be overdone. Let’s hope so anyway.

Population trends

The Australian Bureau of Statistics published population data for March 2021, which showed an increase in population of 21,000 people, to be 36,000 higher than in March 2020. The Corona crunch for population growth, which was 376,000 in the year to March 2020 (pre-crisis). So population growth has slowed to one tenth in approximate terms. Net overseas migration was -95,000 over the year, with natural increase of 131,000 over the year. In fact, the March 2021 quarter saw a little baby boom of sorts.

Interestingly, NOM was -53,500 in Victoria over the past year, whereas NSW only had an exodus of -13,500. That indicates the world’s most locked down city has taken a toll on residents. Many Aussies are moving interstate, while others are fleeing the country entirely.

The Chart above shows Victoria has shifted from being a net attractor of residents to now losing around 1,500 residents (net) every month. No small change. Queensland remains the preferred haven, with over 30,000 net residents gained over the past year. Who wouldn’t mind beaches, cheaper housing (though not by heaps admittedly), less lockdowns and better weather?

Other States are doing better as well, with South Australia, Western Australia and the ACT all swinging to positive NIM over the year ending March 2021. With current events in Victoria, this trend looks set to continue. It’s certainly interesting times if nothing else.

Until next time.

Iron ore crash worsens

Time to eat some humble pie.

I’ve been on record saying commodities were a preferred exposure this year. Markets were discounting sky-high prices as if they would quickly vanish. And perhaps, they are.

It’s been a truly precipitous decline for iron ore to have fallen by over half, from circa US$230/ton to US$100/ton.

Iron ore equities have been savaged, unsurprisingly. FMG, which I bought a few months ago at $22, is now in the $15 range (granted, its paid out a $2.11 dividend). But still, with the benefit of hindsight I was bedazzled by sky-high iron ore prices and massive dividends.

Australia’s majors will still be fine at US$100/ton. The bigger risk is something very sinister in China, such as a desire to cut out Australia’s iron ore industry, regardless of the consequences to itself in the process. It could prop up inefficient domestic iron ore production, prefer exports from Brazil and elsewhere, and leave Australia’s massive industry without its main buyer. No doubt, that would be a disaster, not just for share prices, but the Australian economy. Iron ore is our largest export and a rare bright spot in the CV-19 economy.

Perhaps its surprising the A$ has held up as well as it has, still buying over US72c. If iron ore continues to hurtle lower, surely sub-70c beckons, at a minimum.

On the positive side, the iron ore price looks like it might be at trend line support (see Chart above). Evergrande, an insolvent Chinese property developer, has caused a lot of concern (likely feeding into the IO crash through bad sentiment). Evergrande may alleviate some of its woes if investors take up the offer of discounted properties to redeem their owing investment money. And of course, in a communist country, the government may step in to avoid broader contagion.

At the moment, fear is high and so (at least from where I’m standing), it’s probably too late to jump ship on iron ore equities down by 30/40%. I’ll be riding out the storm. Thankfully, other investments have done better.

Housing roars higher

The housing market surged 6.7% higher in the June quarter according to ABS data to be 16.8% higher over the June quarter in 2020. Some truly remarkable rates of quarterly growth across all capital city markets. The weakest annual growth is 13% (Darwin) with some markets pushing 20% annual growth.

The market is now surging higher at rates not seen since coming out of the GFC in 2009.