Rudi’s View: Retail REITs, Resources, And Lynas

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In this week's Weekly Insights (this is Part Two):

-Cautious, Cashed Up, Looking For Direction
-Not The End, Says Prudential
-Conviction Calls
-Retail REITS And The (Invisible) Risk
–Have Your Say – The CSL Challenge
–Rudi On TV
–Rudi On Tour
-Rudi Talks

[Non-highlighted parts appeared in Part One on Thursday]

By Rudi Filapek-Vandyck, Editor FNArena

Conviction Calls

The March quarter saw Australian equities post their strongest quarterly performance since Q3 of 2009, notes stockbroker Morgans, and the medium term outlook remains positive, but now is probably a good moment to start dialing back somewhat on exposure to risk.

A lot is priced in at present index level and earnings growth on average is unlikely to exceed 4% per annum for the coming years (plural).

The latter average is ex-resources, but is indicative of ongoing tough operational challenges for most companies in Australia. Apart from a more conservative portfolio composition, stockbroker Morgans is also advocating investors should keep a larger than usual proportion of cash on the sidelines.

As long as investors don't get spooked by prospects of inflation flaring up, the outlook for equities should, on balance, remain attractive, suggests Morgans. There simply doesn't appear an inflation problem on the horizon, even though central bankers the world around would like to see some (more) of it.

Time also to dust off the broker's Conviction Calls, as that should be one way to achieve further (out)performance.

Among large cap stocks, Morgans carries Buy ratings with Conviction for ResMed ((RMD)), Sonic Healthcare ((SHL)), Reliance Worldwide ((RWC)), Westpac ((WBC)), and Oil Search ((OSH)).

Outside the ASX100, the broker's selective list consists of Volpara Health Technologies ((VHT)), PWR Holdings ((PWH)), Kina Securities ((KSL)), Senex Energy ((SXY)), and Australian Finance Group ((AFG)).

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Local share market strategists at Citi, on the other hand, this week declared what many an investor dreads to hear: this may be almost as good as it gets for resource stocks.

Citi is not predicting no further upside is possible for the likes of BHP Group ((BHP)), Rio Tinto ((RIO)), Fortescue Metals ((FMG)), and Woodside Petroleum ((WPL)), but shares look significantly less undervalued than they were at the start of the 2019 global equities rally, and at some point expensive looking share prices might become a good enough reason to start pulling money out of the sector.

For now, however, there remains potential for further upside as consensus forecasts can still move higher if commodity prices remain higher for longer, advocate the strategists.

Taking a leaf from history, Citi stategists do make the point that history suggests elevated valuations for the sector, as is currently the case, usually don't make for sustainable returns longer term. For now, however, supply response remains more of a threat than reality and the strategists remain Overweight the sector, with the caveat that the end, surely, must be closer, and getting closer.

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The latest market update by Shaw and Partners Chief Investment Officer Martin Crabb combines a bit of both of Morgans and Citi.

Crabb too thinks the share market does not look attractive enough here to put some extra money in, and that is putting it mildly. He jokingly refers to the possibility of much lower valuations for the market in general, and that's because resources seem to be the only part that provides plenty of cash, plenty of growth, and plenty of potential for upside surprise.

On his observation prospective earnings growth in Australia has been supported by six large cap stocks; BHP Group, Fortescue Metals, CSL ((CSL)), Woodside Petroleum, Rio Tinto, and Santos ((STO)). Did anyone else notice the exception inside those six?

Crabb also highlights spreading market speculation that National Australia Bank ((NAB)) is getting ready to cut the dividend; to $1.80 according to in-house analyst Brett Le Mesurier. Given where the share price resides, he suspects this might already be priced in.

From here onwards and with current index and growth forecasts as the starting point, Crabb suggests dividends not share price gains represent the bulk of prospective return. In other words: the market is priced for everything to be alright. What are the chances of this remaining the case over the next eight months?

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Meanwhile, Canaccord Genuity, predominantly specialised in small cap stocks here in Australia, has updated its Australian Focus List; 11 stocks that come with conviction.

These 11 inclusions are AMA Group ((AMA)), CML Group ((CGR)), EML Payments ((EML)), G8 Education ((GEM)), Infigen Energy ((IFN)), Kogan ((KGN)), Money3 Corp ((MNY)), MOD Resources ((MOD)), Primero Group ((PGX)), Perseus Mining ((PRU)), and Think Childcare ((TNK)).

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Small cap specialists at Ord Minnett have put forward Webjet ((WEB)) as their Top Pick, whereas Tassal Group ((TGR)) remains their Bottom Pick.

And throughout all the ups and downs, and behind-the-scenes scheming by suitor Wesfarmers, CLSA analysts have reiterated (note: not just maintained or repeated) their High-Conviction Buy for rare earths miner Lynas ((LYC)), with a price target of $3.50.

Bell Potter nominates biotech Starpharma ((SPL)) as one of the Top Picks for 2019, with plenty of catalysts on the agenda, or so it seems.

Retail REITS And The (Invisible) Risk

Last week, I was reminded by a gold bug investor on Twitter that, as far as asset investment returns are concerned over the past two decades (1999-2019), gold came in a solid second, well ahead of the average equity or property market, but real estate investment trusts (REITs) have been the killer asset over the period.

The US-based investor in casu was soon villified for his biased view in favour of gold, as is custom these days on social media, with the main accusation being he had strategically picked the starting date at the absolute bottom of the gold cycle throughout the 1990s. Pick a different starting date and the numbers look a lot less favourable for the shiny metal, posted a small dozen other investors in chorus. And I agree.

Surely every less-biased investor can easily see on historic price charts that gold priced in USD peaked near US$1900/oz in late 2011 and has been in a volatile side-ways moving pattern over the past three years?

But this story is not about gold, which came in second best over the whole period (thanks to its stellar rally from 1999-2011), it's about the number one performing asset; REITs. I don't think anybody would have guessed that REITS were the exposure to have for investors, even only a few years ago.

Contrary to gold, REITs number one position was acquired in recent years, from mid-2012 onwards to be precise. Whereas previously this segment of the share market was mostly seen as boring and extremely unexciting, considered prime hunting ground for unprepared retirees desperate for sources of regular income, in recent years this sector has become the number one outperformer that virtually nobody ever talks about.

In Australia, A-REITS have outperformed the broader share market in five out of the past six years, and the sector has continued to perform well in 2019. In case you wondered: 2017 was the year of AREIT underperformance.

This observation provides us with a few key insights: the heavy influence of Quantitative Easing (QE) and extreme low bond yields on global assets, but also how tough the challenges are for the rest of corporate Australia in the light of demographic shifts, technological disruption, extreme low interest rates, and the breaking down of cosy domestic duopolies.

But wait, there's more.

Not every REIT on the Australian stock exchange has been enjoying sustained outperformance since 2012. On my assessment, this is the result of this particular segment equally feeling the impact from the tectonic shifts impacting on the Australian economy in general. These shifts have divided REITS into winners and losers, just like the rest of corporate Australia. The winners, of course, are responsible for the bulk of the sector's stellar outperformance.

Think Charter Hall ((CHC)), and Dexus Property Group ((DXS)), and Goodman Group ((GMG)), but also Centuria Industrial REIT ((CMI)), and Rural Funds Group ((RFF)).

Have not been consistently among the winners, and seen their valuations de-rate in recent years, are the landlords of retail assets. While most investors' attention goes out to what the prospects are for the likes of JB Hi-Fi, Myer, and Premier Investments, the market has decided disruption and transformation are just around the corner for owners of shopping malls and other commercial properties that facilitate big box retailers such as Target, Big W and Dan Murphy's, or smaller boutique retail franchises.

The key problem here is that when shares in Scentre Group ((SCG)), Vicinity Centres ((VCX)) and Shopping Centres Australasia Property Group ((SCP)) -to name three of the obvious landlords on the ASX- are being left behind, their yield attractiveness only increases, in particular when investors stung by Labor's plan to abolish franking cash rebates are looking around for yield-income alternatives.

The problem thus becomes: to what extent have these landlords now become yield traps in a long-winded sector downturn?

On my observation, commercial property space is increasingly subjected to retail shops ceasing presence, if not operations, and it appears there are no quick replacements available. Most empty spaces I spot remain empty for a long time. And while shopping centres are doing a commendable job in replacing failing retailers with food courts, gyms, libraries, bowling centres and other alternatives, the question has to be asked: at what point can current leases no longer be retained, not to mention the necessity to mark down the value of current assets on the balance sheet?

The transformation that is currently hitting retail landlords is slow moving, and negative developments may not become visible for ordinary observers outside the sector for a long while. But retailers such as Premier Investments are responding to slower growth by closing down stores throughout Australia (the local Smiggle in my neighbourhood is no longer in operation), while big box retailers like Target and Big W, who take up a lot more space, are shrinking store numbers in order to remain viable.

The situation becomes a lot trickier if one takes into account that many of the diversified property owners in Australia are looking to sell their retail exposures (wrong timing, all at once) and recent analysis by Citi is suggesting too much additional retail space has been added ahead of what has now become a challenging downturn for bricks and mortar retailers.

In my view, this segment of the local REITs sector is now best categorised by that old Wall Street adage: none of this matters, until it does.

I note Citi's most recent sector update revealed Sell ratings for Scentre Group, GPT ((GPT)), Shopping Centres Australasia Property Group, Charter Hall Retail ((CQR)) and BWP Trust ((BWP)).

At the very least, I'd be wary of any buy recommendation for such assets on the basis of the stock looking "cheap", "relatively undervalued", or seemingly offering too attractive a yield to ignore. Better to be absent when the proverbial hits the fan, exact timing unknown.

Have Your Say – The CSL Challenge

IMPORTANT: THIS INVITATION ENDS ON APRIL 15TH – LAST CHANCE TO SEND IN YOUR STORY!!!

It's probably one of my key achievements since starting FNArena in 2002; to get investors interested in owning shares in CSL ((CSL)) and similar robust, high quality, sustainable growth stories, in defiance of general perception that stocks trading on a high PE multiple can never be owned but for a short term momentum play.

Over the years I have received many supportive emails and vocal encouragement from FNArena subscribers and investors elsewhere. At the end of last week's presentation to ASA members in Sydney, one elderly investor approached me with the words "CSL is such a wonderful company, why would you ever sell it?"

I think time has arrived we started sharing some of those stories with investors who are new to the CSL Challenge. From investors to investors. I am hereby asking those who own CSL shares to write down their motivation, memories, experiences, et cetera in order to share them with other investors.

Make it as detailed/generalised and as long/short as you like. Send it to info@fnarena.com, preferably with reference "CSL Challenge".

You don't have to do it completely pro bono. An innocent hand at the FNArena office will pick at random three contributions that will receive one bottle of wine each. To be eligible, make sure you also indicate whether you prefer red, white or rose. We'll pick one winner for each choice.

I'd say we close this invitation by April 15th, but let's not procrastinate too long. Get onto it right away! We take care of the wine selection.

Rudi On TV

My weekly appearance on Your Money is now on Mondays, midday-2pm.

Rudi On Tour In 2019

-ASA Melbourne, May 1
-ASA Toowoomba, Qld, May 20
-U3A Investor Group Toowoomba, Qld, May 22
-AIA Adelaide, SA, June 11
-AIA National Conference, Gold Coast, Qld, 28-31 July
-AIA and ASA, Perth, WA, October 1

Rudi Talks

Audio interview about what's happening in the Australian share market:

https://www.youtube.com/watch?v=FpCnk1RSnCY

(Part One of this story was written on Tuesday 9th April 2019. It was published on the day in the form of an email to paying subscribers, and will be again on Thursday as a story on the website. Part Two was completed on Wednesday, 10th April 2019 and published on the website on Friday).

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views are mine and not by association FNArena's – see disclaimer on the website.

In addition, since FNArena runs a Model Portfolio based upon my research on All-Weather Performers it is more than likely that stocks mentioned are included in this Model Portfolio. For all questions about this: info@fnarena.com or via the direct messaging system on the website).

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(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.) 

(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)  

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