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As any good investor knows, half the battle in sharemarkets is recognising when to stick with the trend and let profits run, rather than chop and change to the latest ‘hot’ idea.

Two key ideas in this column – buying US equities with unhedged currency exposure, and owning stocks exposed to the Australian residential property cycle – are as relevant today as they were last year. Both trends have further to run, even after stellar gains in the past 12 months.

To recap, this column was bullish on US equities early in 2013, amid signs of recovery in the US economy, and on a view that the Australian dollar – was and still is – overvalued. The suggestion was to gain exposure through the iShares S&P 500 ETF, which is unhedged for currency movements.

That ETF returned 45 per cent over one year to January 31, 2014. Although I proposed taking some profits in US equities late last year, it was premature to be bearish on US sharemarkets, or to increase emerging markets exposures as the expense of stgeloped market allocations.

The second trend, property-related stocks, will strengthen in 2014. I remain bullish on the property market and the building cycle for three key reasons: interest rates, property indicators and earnings.

The Reserve Bank’s latest minutes reaffirmed its neutral stance on interest rates.  I expect another interest rate cut later this year as labour markets weaken, but a neutral official cash rate for an extended period is still good news for housing affordability and underlying property demand.

A rising unemployment rate in 2014 and weaker consumer confidence will not be enough to stall the housing recovery, given Australia’s record-low interest rates. And with property prices set for single-digit gains this year, there remains enough incentive for investors to buy early.

Recent property indicators confirm the market’s strength. In February, Sydney recorded its second week of auction clearance rates above 80 per cent. Melbourne’s was a notch above 70 per cent. Higher property turnover is good news for property service and information providers.

Housing finance approvals were 14.1 per cent higher over the year to December 2013. However, first-home buyer activity remains depressed and there were signs that finance to owner-occupiers may have peaked. Still it’s hard to make too much of December housing data.

Dwelling approvals were also below consensus forecasts in December, after strong gains in earlier months. Some temporary softness in the housing market would not surprise, as consumers digest high-profile company closures and job losses. But it will not be enough to damage the trend.

My initial preferred exposures with property market were the information providers, Nearmap and OnTheHouse Holdings. Nearmap, identified early last year when it had a low market profile, has been a beauty; OnTheHouse not so.

Furniture retailer Nick Scali Holdings, and the Perth-based stgelopers Cedar Woods Properties and Finbar Group, were others property-related stocks identified in this column. The final inclusions were Suncorp, Bank of Queensland, and Bendigo and Adelaide Bank, as a play on housing finance.

With the exception of OnTheHouse Holdings, nothing has changed my positive view on these stocks, even after strong share price gains.

The one-year total shareholder return for these stocks (including dividends, where paid) is: Nearmap (433 per cent), OnTheHouse (-24 per cent), Nick Scali (50 per cent), Cedar Woods (49 per cent), Finbar (27 per cent), Suncorp (13 per cent), Bank of Queensland (40 per cent), and Bendigo and Adelaide (25 per cent). Not all of these stocks were identified a year ago, but returns have still been strong.

Nick Scali this month delivered yet another solid interim profit and showed why it is one of Australia’s better-run small listed companies. Bendigo and Adelaide Bank had a mixed result, and Suncorp raised its interim dividend, despite a drop in net profit. Cedar Wood’s interim result this month will attract plenty of interest.

Although these stocks look fully valued for now, those who bought early should continue to hold, while prospective buyers could wait for any share price weakness – possibly in the traditionally softer May /June period – to gain exposure, in anticipation of a continuing recovery in housing construction and established property markets in 2014 and 2015.

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 adviser before acting on themes in this article. All prices and analysis are at Feb 19, 2014.

 

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