Rolling with the punches

Update: have been rolling with punches as tech stocks and crypto have been smashed. Losses have spilled over into other assets as well, but not as severely.

Rule #1 in gut-wrenching sell-offs: don’t make emotional decisions.

The emotional decision is to tap out to stop the losses piling up.

That’s not a smart decision though, generally speaking. If you were happy to hold an asset, why would you sell it at a 40%/50/60/70/80% lower price? Unless something has fundamentally changed, the asset has become more attractive, not less.

We can say a lot about the current market ructions, and there’s no shortage of worries – Central Banks going ‘psycho’ mode with interest rate hikes be a prominent one.

Yet, on a longer term perspective, sell-offs are generally great buying opportunities.

I remember my first bad market sell-off I went through (the GFC in 2008), a friend’s father told me to buy quality companies and gut it out, ‘the BHPs of the world will always be there’. Sadly, he passed away a few years after this, but his words stayed with me. And BHP is still indeed here.

Buy quality assets at good prices and try and block out the noise.

RBA hikes …

Left in the dust by other central banks around the world, the RBA unsurprisingly hiked rates at its May meeting, lifting the cash rate by 25 basis points to 35 basis points (0.35%).

In doing so, Governor Lowe had egg on his face, betraying his comments that rates would remain anchored around zero until 2024 at the earliest. More worryingly, will be how many recent homebuyers will have egg on their faces, should the RBA continue to hike rates at a decent clip.

My gut feeling is it won’t take long for mortgage holders to start to pop. This isn’t happening in isolation. Households are already being squeezed by inflationary pressures in a low wage growth environment. Fuel prices have had some relief after the Budget move to ease the fuel excise levy, but remain uncomfortably high. Food prices have been rising, particularly for the likes of red meat. Your morning coffee is edging higher in price. More worryingly, there have been rising electricity spot prices, meaning households may be in for some more nasty bill shock from the energy retailer. Nothing’s cheap.

Seen in that context, a gradual tightening of the screws by the RBA has the ability to cause heavily-indebted mortgage holders to break out in a sweat. It may be some time till that happens, afterall, the official cash rate isn’t even half a percent. However, the trend is clear, and as they say, the trend is your friend (or not).

Frustratingly for households, the value of shares and crypto has had a tough 2022 to date. Personally I’m down tens of thousands of dollars. Theoretically, if I were forced to sell assets to help fund my mortgage/living costs, I’d be now doing so at a fair haircut.

As a result, it’s a bad ‘perfect storm’ of sorts for indebted property holders with other assets. Living costs are rising inexorably, mortgage costs will be rising, while asset prices are falling! You’ll understand if I’m not posting as often…

Tech wreck

Thanks to CommSec for this one, the name says it all.

Many tech stocks have been taken out the back and shot.

Higher interest rates and some underwhelming earnings have led to this massacre.

That said, there are likely to be opportunities as well for those growth stocks which aren’t just sizzle.

Property market slower

CoreLogic showed the five city capital aggregate increased by 0.3% over March, much slower than its recent clip. Sydney (-0.2%) and Melbourne (-0.1%) are now heading backwards while Brisbane (2.2%) and Adelaide (1.9%) continue to fly. Relative affordability and migration trends have benefitted these cities.

With cost of living pressures front of mind, no doubt many households have been spooked by the thought of taking seven figure mortgages while cost of essentials (food, fuel etc) has risen noticeably. As an example, a steak I usually buy at the supermarket recently jumped from $5 to $7, a 40% increase. Not much in isolation, but when it happens across your grocery basket it becomes a bit more painful!

Added to this is the very real prospect of increase in interest rates. That would make the mega mortgage that much harder to pay. Put all this together, and it’s not surprising to be seeing a bit more trepidation in the property market. As I always say, if it looks too easy to make money (i.e. buy a house and sell it for hundreds of thousands more next year), that’s a good sign the party may be almost over. Crypto and equities have been struggling for a while, it may be property’s turn.

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Until next time

Growth rebounds

As I mentioned a couple of posts ago, I’m always looking for unpopular trades. Recently, growth/tech stocks have been very unloved. Fears over rising interest rates, stretched valuations and geopolitical tensions saw share prices get decimated.

I mentioned I picked up some Meta (Facebook) stock at $190 (see post ‘Is Meta dead?’) – which marked a 50% sell off from its highs around $380 in the second half of 2021. The stock was trading on a PE ratio of 14 at the time, which is crazy low for a stock with a strong growth history.

Currently Facebook sits just under $220, a nice 15%+ move off that buy. I’m also up over 10% on Google which I bought another share in at $2550 (currently $2,825). Yet these stocks haven’t been alone in rebounding and the Nasdaq is paring some of its losses. Having hit around 13,000, the index stands at closer to 15,000 now (14,765 at the time of writing), a handy rebound.

Markets have taken the Fed’s interest rate hike in March in their stride.

Meanwhile, the $A has shown some strength to be buying around US75c. Higher commodity prices have benefitted our currency, which relieves some pressure on the RBA to hike rates (which would tend to push the currency higher still). For Aussie investors holding overseas shares, the higher $A is a little unwelcome.

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Until next time.

House prices end 2021 on a high

The ABS’s dated release for dwelling prices showed house prices sizzled higher in the December quarter of 2021. At the national level prices increased by 4.7% over the quarter to be a whopping 23.7% higher over the year. There have been no real losers in this upswing at the city level, though some have naturally done better than others.

Annual house price growth year-to

A great time to hold property, which has – so far – not suffered the downward movement that crypto/shares have. Pride goeth before a fall?

With Australia now lagging other major central banks, who are increasing rates, time might be ticking on our highly valued property market. With money markets pricing in some pretty meaningful increases in rates, I can’t help feel some mortgage owners are going to have their feet held to the fire.

I had this conversation with a co-worker. If you have a meaningful mortgage (as both of us did), what is the best option now given interest rates will likely rise? Paying down the mortgage (whether directly or through an offset account) looks like a safe move. Historically I’ve preferred to invest any excess funds, figuring I’ll likely beat the rate of mortgage interest (c. 3%). However, potentially now would be a good time for a bit of added caution. Of course, it doesn’t have to be on or the other, and you could e.g. put 50% of savings to the offset account and invest 50% in shares.

The beauty of investing in shares is the passive income, which itself can be used as a cashflow tool if necessary to pay expenses.

As they said in Game of Thrones, winter is coming…

Is Facebook (Meta) dead?

One of many casualties on the stock market this year has been Meta. It started the year around US$340 a share, but now trades at just over $190/share. This marks a circa 50% decline from its all-time highs over $380/share in 2021.

Have things been that bad for Meta? Shares really started tumbling after a poorly received quarterly report earlier this year. Earnings came in lower than expected as the company reported challenges due to inflation, supply chain disruptions at advertisers and users shifting to products that monetize at lower rates. Forecast revenue for Q1 2022 was $27-29 billion, while analysts were looking for over $30 billion. Earnings per share for the quarter was $3.67 vs $3.84.

These numbers might have slightly disappointed but they are by no means terrible. At first glance the savage sell-off looks overdone. Say we conservatively annualise earnings to 4*3.5 = $14 per share, then the company is trading on a PE ratio of 14. For a company with Facebook’s historical growth, that looks pitifully low. Even if earnings were to stall here (peak Facebook), a PE ratio of 14 looks quite conservative. While it’s tempting to always call a peak, the company has been growing for years, despite no shortage of controversies surrounding the platform (censorship, misinformation, data privacy concerns etc).

It would take a brave investor to bet against Meta. At this point, further downside would appear to be limited. Personally I bought some additional shares at $190/share, a nice 50% discount from 7 months ago.

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Until next time.

Property gains cool in February

CoreLogic showed house price gains slowed significantly in February (0.30%). This was the weakest recording since late 2020.

Prices in Sydney actually fell (0.1%) over the month, while Melbourne eeked out a miniscule 0.01% gain. Brisbane (1.96%) / Adelaide (1.53%) remained the strongest markets, with Hobart and Canberra still doing ok (but less strong than in recent history).

This comes as no surprise after prolonged rapid gains. Wage growth has remained relatively weak (c. 2.3% pa), population growth has slowed dramatically (due to less migration) and the interest rate stimulus has largely washed through by now. If anything, people are turning their eyes to the prospect of higher interest rates. Fixed rate mortgages have been moving higher for months now, while expectations are the Reserve Bank of Australia (RBA) will start to increase rates in the foreseeable future.

On a slightly different note, the Ukraine/Russia situation has the potential to be a ‘black swan’ (maybe grey…) in terms of economic/financial markets. It’s still early days to say how this will play out, but prices of commodities such as oil, coal, aluminum and nickel have all ripped higher (as Russia is a significant producer on the world scale). Dislocations could also affect central bank plans around the world, depending on how things play out.

It remains a turbulent time!

Equities continue to struggle

Share markets continue to struggle around the world as we approach two months down of 2022. The ASX200, which tracks Australia’s largest 200 stocks has moved down by around 10% since its high in August 2021. That’s six months of pretty poor performance if you’re an Australian investor. Other markets across the world have tracked similarly.

After a face-ripping rally off the CV-19 lows in March 2020, equities have had a breather. Concerns over inflation, supply chain disruptions and the prospect of higher interest rates have weighed on markets. More recently geopolitical concerns around Ukraine/Russia have roiled markets again.

An optimist would say this may be a great time to pick up stocks. Many shares, particularly growth stocks, have been punished severely. Growth stocks have suffered a double-whammy amid risk-off sentiment (meaning allowable Price to Earnings/Sales ratios have shrunk) and the prospect of higher interest rates, which reduces valuations, regardless of sentiment. Even growth stocks which are still posting positive results, Alphabet being an example, have languished. Those that have posted poor results have been taken to the woolshed. Beyond Meat springs to mind. Meta (Facebook) has also been caned in 2022, currently down by almost 40%.

Amid the carnage, commodity stocks have performed well. The likes of BHP/RIO are nicely in the green this year. Commodity prices have been strong in an inflationary environment and robust underlying demand. BHP and RIO have both announced another bumper dividend, following their cash bonanza in 2021. RIO for example is paying out a semi-annual $6.63 dividend on a circa $115 share price. That will make for a lot of happy shareholders, myself included.

However I generally like to invest counter-cyclically. I wrote of buying resource stocks amid the iron ore crash in the second half of 2021. Currently, counter-cyclical investments would have to be more growth stocks (and crypto, if you’re so bold).

Until next time.

Housing update

Apologies I haven’t been posting a great deal lately, been busier than a brickie in Baghdad (whatever that saying means). Work, training for marathon #3, social life etc. It takes it out of you.

CoreLogic showed dwelling prices increased by 0.82% in January. Again, Sydney (+0.62%) and Melbourne (+0.23%) dragged down broader gains, with SA/QLD/TAS/ACT remaining robust. Brisbane (incl Gold Coast) won the month with 2.3% growth.

House price gains continue to beggar belief. The interest rate cycle looks set to turn against them though. Expectations are mounting that the Reserve Bank will raise rates again in the foreseeable future. That’s something property prices haven’t seen in many a year (2011 or around there if memory serves). In New Zealand, the Central Bank raised rates twice in the back half of 2021 to 0.75% (from 0.25%). The UK has seen its rate rise from 0.1% to 0.5%. Clearly the tide is turning in an inflationary environment. Anyone buying at these runaway prices would have to be slightly nervous… you’d hope.

Meanwhile our largest residential lender, CBA, released its results for H1 2022. Great results with statutory NPAT of $4.74 b (up 26% on H1 2021) and operating performance of $6.6b (up by 4%). The bank declared an interim dividend of $1.75, which is up on a year ago (98c) but still lower than its pre-CV 19 interim dividend of $2. However, announcement of a $2b share buyback softens the blow for holders. Results were well received with the stock increasing by 5.6% to just under $100 per share. I posted a few months ago I took some profits over $105 in CBA. I couldn’t resist picking up most of what I sold recently at $93.40. Never bet against winners…