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This column has regularly referred to two strong themes for 2013. The first, buying US equities in unhedged currency terms, has worked well, but as mentioned last week it is time to take some profits.

I note US investment publication Barron’s this week warned about signs of a US sharemarket correction, partly based on the recent boom in initial public offerings (IPOs) in the US. It is often a signal to sell when companies are rushing to raise capital and float when share prices are racing higher.

The second theme, a coming property boom in Australia, was identified earlier this year. The logic was simple: two or three interest rate cuts in 2013, taking rates to record lows, would put a rocket under parts of the residential property market. You could feel the momentum building.

A boom is well under way in Sydney and property markets are strengthening in most capital cities. I read reports this week of a one-bedroom semi-detached house in Woollahra selling for $1.3 million at auction. Beautiful spot Woollahra – I lived there for years and in other eastern suburbs, but even by Sydney standards, $1.3 million for a one-bedroom house is jaw-dropping.

Melbourne’s property market is more subdued by comparison, partly because of a higher property supply than Sydney. It might take a year or two, but Melbourne property prices will grow faster as another one, probably two, interest rate cuts in the next year boost demand.

My local property agent told me this week that even average family homes in parts of Melbourne’s south-east were fetching up to $1.5 million, such is the demand for family housing and limited supply of such stock. I have also heard anecdotal reports of strong prices in Queensland’s south-east.

The stars are rapidly aligning for the property market: rising housing affordability as interest rates fall; a fairly benign unemployment rate; the big confidence boost coming when the Coalition wins the September 7 election, as latest polls suggest; and the fact that many property markets still have a long way to go to get back to previous highs after a weak 2010-2012 period.

As a homeowner, I should welcome rising property prices and lower interest rates. But I can’t help thinking super-low interest rates, at this stage, are bad rather than good and they signal that something dangerous is brewing in the economy in the medium term. Rising property prices as the economy weakens and unemployment rises is a dangerous cocktail, and the inevitable consequence of super-loose global monetary policies.

However, as an investor, the challenge is to make money from strong, emerging trends. I suggested a few small property-related stocks earlier this year: furniture retailer Nick Scali, property image provider Nearmap, and online property information provider and portal Onthehouse Holdings.

Nick Scali and Nearmap have rallied this year and Onthehouse has disappointed. The market was jittery about delays on Onthehouse securing deals with financial service institutions and the effect on revenue – estimated at up to 5 per cent lower.

News in July that Onthehouse entered into strategic alliances with two major banks gave the stock a small boost, but at 48 cents it trades well below the 52-week high of 88 cents. If ever the stock is going to recover, it is in the early stages of a residential property boom but Onthehouse, and Nearmap for that matter, are speculative and suit experienced investors.  

Conservative investors looking to play the property boom will find safer leverage through the banks. The big four are aggressively targeting share in the home-lending market, with rate discounts and some fees waived. But with the big banks fully priced, some second-tier banks and building societies are worth considering.

I favour those exposed to the recovering south-east Queensland property market: Suncorp, Bank of Queensland and Wide Bay Australia. They look well placed to capitalise on any property recovery and rising demand for home loans, and should benefit as the Queensland economy strengthens.

Second-tier banks also look well placed to build market share in small-business lending, and capitalise on unhappiness by small business with big bank lending practices, and a tight credit market for smaller enterprises. But that’s another story.

Although Suncorp has rallied strongly since mid-2012, its recovery has further to play out over the next year or two, albeit at a slower pace, given its long period of underperformance after the GFC.

Like Suncorp, Bank of Queensland has rallied since mid-2012 and has a long way to go to get back to previous peaks above $12 after an extended period of underperformance. I like how management is turning around the underperforming Bank of Queensland, helping it to realise its potential and great brand.

Some big headwinds for Bank of Queensland – notably a sharp increase in bad debts in 2012 thanks to a weak economy, rising unemployment, and sluggish property prices – will ease in the next two years, provided the resource sector stabilises and other sectors, such as tourism, services and housing, and agriculture can pick up the slack.

Bank of Queensland and Suncorp’s other attraction is yield: around 6 per cent, fully franked. Their income looks reasonably reliable and gives investors scope to wait while the Queensland property recovery catches up to other states, and boosts home lenders.

Click on the links below to read other articles from this week’s newsletter

1. Rate Cuts – 6 Stocks Brokers Like Now: Discretionary retailers and building product…

2. Is A Property Upturn Brewing? Stocks To Benefit: Conservative investors looking to play the…

3. 18 Share Tips – 19 August 2013: 18 Share Tips to BUY, SELL & HOLD from…

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7. Why the USD Will Surge if the Dow’s Slide Accelerates: Don’t position for AUDUSD and GBPUSD…

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9. Stocks on a roll: ASX rolling 52-week highs for the previous…

10. Stocks on the slide: ASX rolling 52-week lows for the previous…

 

–    Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their financial adviser before acting on themes in this article. All prices and analysis at August 14, 2013.