In July, defensive equities continue to be underpinned by declining global bond yields. The ongoing trade dispute between China and the US continues to gain momentum with neither side looking to back down from their respective views. Meanwhile in the UK, Boris Johnson became the new Prime Minister replacing outgoing Theresa May. With Johnson perceived as a hardliner towards Brexit, the uncertainty as to how this plays out continues to be a headwind for the market. This ever increasing uncertainty is being reflected in the ongoing bond yield rally – with Aussie 10yr bonds declining by a further -14bpts in July. Central banks around the world are also reacting, cutting official interest rates in the hope of stimulating an increase in economic activity and to generate upward inflationary pressures. To date this has been met with mixed success.
In June, a deteriorating global growth outlook continues to push both the cash rate and global bond yields lower. This has driven a flight to defensive sectors such as A-REITs and infrastructure, given their historical high correlation. As a result, brokers continue to upgrade many of these defensive names given the lower risk free rate used in their valuation models. Meanwhile, domestic headwinds continue to intensify. The Australian housing market remains sluggish and lending restrictions are tight, whilst inflation and wages growth is anaemic. In an attempt to stimulate the economy, the RBA cut official interest rates to a record low 1% during the month.
In May, a deteriorating global growth outlook and continued trade disputes continued to cause an ongoing decline in bond yields, driving investor appetite towards interest rate sensitive asset classes such as AREITs and listed infrastructure. Domestically, the Federal election result and its absence of changes to negative gearing and capital gains taxation buoyed the broader equity market, and in particular residentially exposed names re-rated sharply during May. The broader backdrop however remains challenging, characterised by low core inflation, persistent slack in employment and a housing market constrained by lending restrictions. As a result, the Reserve Bank cut the cash rate to 1.25% as widely expected, addressing spare capacity in the labour market to progress towards the inflation target.
In April, a rebound in US retail sales and a GDP reading coming in above expectations saw bond yields in the US increase slightly over the month, despite recent rhetoric by the Federal Reserve that any interest rates likely remain on hold. Domestically, the housing sector continues to see valuation declines impacting consumer sentiment. Furthermore, inflation for the quarter was well below expectations leading many market participants to speculate an interest rate cut may be imminent.
The following is an Australian Financial Review article written by Duncan Hughes who writes on Real Estate specialising in Commercial, Residential.
For the original article click here.
Australian Financial Review: Retail property faces earnings pressure on several fronts, warns manager (20 March 2019)
In February, Australian bond yields continued to rally following the release of mixed economic data, which has prompted a shift in leading economist expectations to an RBA easing bias over the course of the year. In the US, despite an increasingly cautious statement from the US Federal Reserve on its outlook for US growth, there was increasing optimism over a trade resolution with China following President Trump’s decision to postpone an increase in tariffs citing ‘substantial progress’ in discussions.
In January, defensive sectors continued to benefit from the increased global caution that saw the US Federal Reserve soften its global growth expectations. Bond yields in the US and domestically declined by -6bpts and -8bpts respectively as a result. In the UK, Prime Minister Theresa May’s Brexit plan was overwhelmingly rejected by the UK parliament which further fuelled equity market volatility and global growth concerns. Domestically, the focus continues to centre around the housing market with dwelling prices continuing to fall nationally due to a tightening of the lending criteria.
Until recently, retail assets have been highly sort after by listed and unlisted property owners, attracted to the highly defensive and predictable cashflows that retail property has typically delivered. But this is now changing and there are suggestions unlisted super funds are looking to down weight their exposure to retail property. In addition, several listed REITs such as Vicinity, Stockland and GPT Group are selling assets with varying degrees of success.
With annual reporting season now in full swing, we look at the latest movements in the domestic REITs and infrastructure space, providing a glimpse into what lies ahead for shareholders.