Share Market

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<p>After a roughly 35% plunge from their February high point to their lows around 23 March on fears regarding of global recession on the back of the coronavirus shutdowns, share markets have since rebounded sharply, led by US shares.</p>
<p>The rally has pushed the Australian ASX 200 back through 6000 for the first time since March.</p>
<p><a href="https://www.propertyobserver.com.au/images/2020/6/10/share%20market%201.jpg" target="_blank">Click here</a> enlarge: </p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/6/10/share%20market%201.jpg" alt=""></p>
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<p><span>A common concern is that the rebound in share markets is </span><span>“too optimistic” and “irrational” – </span><span>how can share markets rebound so rapidly when economic conditions are so weak, coronavirus uncertainty remains high, the US is seeing civil unrest and US/China tensions are rising? </span></p>
<p><span>I must admit that I have also been surprised by the speed of the rebound and think maybe the markets are ahead of themselves. But I have seen this happen before and it reminds me of the quotation from the investor Sir </span><span>John Templeton “bull markets are born on </span><span>pessimism, grow on scepticism, mature on optimism and die of </span><span>euphoria” as this rally has occurr</span><span>ed against a lot of pessimism with shares climbing a wall of worry. </span></p>
<p><span>But as the quote reminds us, </span><span>that’s </span><span>what they often do. The plunge in shares into March led the coronavirus hit to activity &amp; fear of recession on the way down and in the process surprised many at the severity of the fall and now it</span><span>’</span><span>s led on the way up despite still lots of worries.</span></p>
<p><strong>Key drivers of the rally</strong></p>
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<p><span>So </span><span>what’s </span><span>driven the rally? In early April we listed </span><span>signposts </span><span>to watch as to whether shares have bottomed. The key signposts are updated in this table.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2020/6/10/share%20market%202.jpg" target="_blank">Click here</a> to enlarge: </p>
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<p><span>Virtually all of the signposts now tick off positively for developed countries. These are highlighted in green. So, put simply the rebound in shares has been driven by a combination of:<br></span></p>
<ul>
<li>Falling new coronavirus cases in developed countries.</li>
</ul>
<p><a href="https://www.propertyobserver.com.au/images/2020/6/10/share%20market%203.jpg" target="_blank">Click here </a>to enlarge: </p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/6/10/share%20market%203.jpg" alt=""></p>
<ul>
<li>Positive news regarding anti-virals and vaccines.</li>
<li>The reopening of developed countries as lockdown measures have been eased. This includes Australia which has gone from mildly severe lockdown to intermediate.</li>
</ul>
<p><a href="https://www.propertyobserver.com.au/images/2020/6/10/share%20market%204.jpg" target="_blank">Click here</a> to enlarge: </p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/6/10/share%20market%204.jpg" alt=""></p>
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<li>Massive fiscal and monetary support measures which have swamped those seen in the GFC. This has helped preserve businesses, jobs and incomes preventing defaults. Low interest rates also help make shares attractive for investors.</li>
<li>Green shoots of recovery. With the progressive relaxation of lockdowns, timely measures of economic data such as consumer confidence, restaurant bookings, retail foot traffic, credit card data, mobility indexes and jobs data suggest that US and Australian economic activity bottomed in April. See the next chart. Global business conditions indicators often referred to as PMIs also started to turn up in May after a plunge into April. This follows a similar pattern in China.</li>
</ul>
<p><a href="https://www.propertyobserver.com.au/images/2020/6/10/share%20market%205.jpg" target="_blank">Click here </a>to enlarge: </p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/6/10/share%20market%205.jpg" alt=""></p>
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<li>Investors being pessimistic and underweight shares after the plunge in March. This has meant there has been more investors who can be motivated to buy shares than sell.</li>
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<p><span>These considerations have simply swamped concerns about civil unrest in the US (which now appears to be settling down anyway) and US-China tensions.</span></p>
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<p><strong>Confirmation from other markets</strong></p>
<p><span>It</span><span>’</span><span>s not just shares that have rebounded as the rally has been confirmed by other growth sensitive assets/yields. In particular:</span></p>
<ul>
<li>Oil and metal prices are up sharply from their lows.</li>
<li>Commodity currencies like the $A have rebounded at the same time that the safe haven US dollar has fallen.</li>
<li>Bond yield have lagged the upswing in share markets, but they have now started to rise, albeit they remain very low.</li>
</ul>
<p><strong>So why has the US share market led on the way up?</strong></p>
<p>The US share market has a relative high exposure to tech and health care stocks that have been key beneficiaries of the coronavirus shock, Amazon is now 55% of retail stocks’ market capitalisation and the US has also seen more money printing or QE by the Fed compared to other countries including Australia.</p>
<p>By contrast, non-US and Australian shares are more cyclical – but should start to benefit as the recovery continues.</p>
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<p><strong>Correction risk</strong></p>
<p><span>After huge rallies most shares are technically overbought which could mean we see a correction over the next few months. </span></p>
<p><span>But many shares in many share markets are at overbought extremes often seen in the aftermath of major bear market lows and this augurs well for returns on a 6-12 basis.</span></p>
<p><strong>But what about the slump in earnings?</strong></p>
<p><span>Earnings are taking a big hit from the impact to economic activity and this has seen earnings estimates slump and price to earnings multiples surge. This is clearly a concern but note a typical </span><span>“cyclical” </span><span>rebound in shares goes through three phases.</span></p>
<ul>
<li>Phase 1 sees an unwinding of cheap valuations helped by easy monetary conditions but with receding downside risks causing some investors to snap up undervalued shares. This is the phase where shares climb a “wall of worry”.</li>
<li>Phase 2 is driven by strengthening profits.</li>
<li>Phase 3 sees euphoria with very bullish investors pushing shares to extreme levels. This is despite shares becoming expensive and central banks raising interest rates.</li>
</ul>
<p>Right now, we are nearing the end of Phase 1. As economic conditions recover profits are likely to strengthen and we will move into Phase 2.</p>
<p>While PEs are now high, it’s noteworthy that the equity risk premium which can be crudely measured as the gap between earnings yields (using forward earnings) and bond yields is still reasonable reflecting ultra-low bond yields. But an improvement in earnings will be a key thing to watch for.</p>
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<p> </p>
<p><a href="https://www.propertyobserver.com.au/images/2020/6/10/share%20market%206.jpg" target="_blank">Click here</a> to enlarge:</p>
<p><strong><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2020/6/10/share%20market%206.jpg" alt=""></strong></p>
<p><strong>What are the key risks? </strong></p>
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<p><span>The three big risks are: a second wave of coronavirus cases </span>(which should be able to be avoided with lots of testing, tracking and quarantining and even if it does occur may not have the same negative economic impact as any renewed lockdown is likely to be milder and deaths are likely to be lower given greater preparedness); collateral damage from the shutdowns resulting in a delayed or very slow recovery as bankruptcies surge and unemployment goes higher (so far so good – with government and central bank support hopefully heading this off); and risks around the US election (such as Trump ramping up tensions with China if he feels he has nothing to lose or investors fretting about higher taxes and more regulation under a Democrat victory across the Presidency, House and Senate).</p>
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<p><strong>Concluding comment</strong></p>
<p><span>Shares are vulnerable to a short-term consolidation or pullback. But if we are right and April was the low in economic conditions then shares are likely to be higher on a 6 to 12-month horizon.</span></p>
<p><span> The experience of the last few months highlights just how hard it is to time market bottoms </span><span>– </span><span>a good approach for long-term investors is to average in over several months after major falls.</span></p>
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<p><span>SHANE OLIVER </span><em>is the Head of Investment Strategy and Chief Economist at AMP Capital</em></p>
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Shares climb a “wall of worry” but is it sustainable? Shane Oliver 

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<p><strong><span>EXPERT OBSERVATION</span></strong></p>
<p><strong>Australian shares back to their 2007 high...at last!</strong></p>
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<p><span>After nearly 12 years the Australian share market is above its November 2007 pre-Global Financial Crisis (GFC) high. </span></p>
<p><span>The All Ords index surpassed it last week and the ASX 200 has done so this week. </span></p>
<p><span>Basically, the Australian share market is looking through short-term uncertainties around the economy and focussing on lower interest rates and bond yields making shares relatively cheap, the likelihood that policy stimulus will ultimately boost growth, high iron ore prices boosting mining companies and a positive global lead. </span></p>
<p><span>But why has it taken so long? Is the break out sustainable? And is the relative underperformance of Australian versus global shares over?</span></p>
<p><strong>Why has it taken so long?</strong></p>
<p><span>12 years is a long time to make a new high. US shares made it back to their 2007 high in 2013 and global shares did so in 2014. </span></p>
<p><span>See the next chart. Since the March 2009 GFC low, Australian shares are up 118%, versus a 222% gain in global shares in local currency terms and a 347% gain in US shares.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%201.jpg" target="_blank">Click here</a> to enlarge: </p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/8/1/share%20market%201.jpg" alt=""></span></p>
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<p><span>So why has the Australian share market underperformed global shares since the GFC such that it</span><span>’</span><span>s taken far longer to regain its 2007 high? There are basically five reasons:</span></p>
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<p><span>• </span><span>Payback for its huge outperformance last decade </span><span>–</span><span>Australian shares go through periods of relative out performance and underperformance versus global shares. </span></p>
<p><span>This can be seen in the next chart that shows the value of Australian shares relative to global shares. After underperforming global shares through the 1990s tech boom during which Australia was seen as </span><span>“old economy” it</span><span>came roaring back during the resources boom last decade resulting in a huge outperformance. </span></p>
<p><span>This is also evident in the previous chart </span><span>– </span><span>whereas global and US shares just made it back to their 2000 tech boom high by 2007 Australian shares more than doubled in value. </span></p>
<p><span>This meant that the 2007 high for Australian shares was a much higher high than for global shares which really just spun their wheels last decade. </span></p>
<p><span>So, the poor relative performance of Australian shares this decade is payback for their huge outperformance last decade. So, it</span><span>’</span><span>s naturally taken longer for Australian shares to get back to their pre-GFC high.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%202.jpg" target="_blank">Click here</a> to enlarge: </p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/8/1/share%20market%202.jpg" alt=""></span></p>
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<p><span>• </span><span>Tighter monetary policy for much of the post GFC period </span><span>–</span><span>whereas the US, Europe and Japan had near zero interest rates and quantitative easing, Australia has had much higher interest rates (until just recently) and no money printing.</span></p>
<p><span> In fact, the relative underperformance really started in October 2009 when the RBA started to raise interest rates post GFC which was not followed by other major developed countries. See the previous chart.</span></p>
<p><span>• </span><span>The surge in the $A to $US1.10 in 2011 </span><span>– </span><span>this reduced the competitiveness of Australian companies from which the damage can take a long time to reverse even though the $A has fallen to around $US0.70 in the last four years.</span></p>
<p><span>• </span><span>The slump in commodity prices from 2011 </span><span>– </span><span>this weighed heavily on resources shares into 2006. US, European and Japanese shares have a lower exposure to resources.</span></p>
<p><span>• </span><span>Property crash phobia </span><span>– </span><span>foreign investor fear of a crash in</span><span>Australia’s relatively expensive </span><span>housing market has been a constant theme. Therefore, many stayed away.</span></p>
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<p><strong>Are high dividends holding Australian shares back?</strong></p>
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<p><span>An often heard view is that Australian companies are not investing because shareholders are demanding high dividends, and this is causing poor earnings growth and share market returns. This is unlikely. </span></p>
<p><span>The dividend payout ratio (ie dividends relative to earnings) is in line with its historic norm. And </span><span>it’s</span><span>mainly resources stocks that have boosted payouts since the GFC </span><span>– </span><span>but i</span><span>t’s </span><span>been hard to argue they should ramp up </span>investment so soon after the mining investment boom.</p>
<p><a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%203.jpg" target="_blank">Click here</a> to enlarge: </p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/8/1/share%20market%203.jpg" alt=""></span></p>
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<p><span>The real reasons for the lack of investment by non-mining companies are likely to be post-GFC caution, wariness after getting smashed through the mining boom by the high $A, spare capacity &amp; competitive pressures, uncertainty about demand and too-high investment hurdle rates.</span></p>
<p><span>More fundamentally</span><span>, Australia’s high dividend payouts are</span><span>healthy from a long-term perspective: high dividend payouts mean less risk of poor investment decisions from retained earnings, they are indicative of corporate confidence about future earnings and they indicate earnings are real.</span></p>
<p><strong>2007 high was reached in 2013 with dividends</strong></p>
<p><span>In fact, because Australian shares pay relatively high dividend yields (around 4.1%) compared to global shares (2.5%) they should be included in comparisons of Australian with global share market returns. </span></p>
<p><span>Once dividends are allowed for (ie looking at the accumulation index, or total returns) the Australian share market surpassed its 2007 high in 2013.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%204.j">Click here </a>to enlarge: </p>
<p><span><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/8/1/share%20market%204.jpg" alt=""></span></p>
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<p><span>The next chart compares the relative performance of Australian to global shares since 1970 in terms of: relative share price performance in local currency terms (green line); relative total returns ie with dividends added in (blue line); and relative total returns with global shares in Australian dollars (red line). </span></p>
<p><span>A rising ratio means Australian outperformance and vice versa. Several things stand out. First over long periods of time and when dividends are allowed for Australian shares have had better returns than global shares. </span></p>
<p><span>Since 1970 Australian shares have returned (capital growth plus dividends) 10.4% per annum compared to 8.3% pa for global shares in local currency terms. </span></p>
<p><span>The falling $A over this period has enhanced the return from </span>global shares to 9.9% pa but they still slightly underperformed Australian shares.</p>
<p>Second, the swings in the relative performance of Australian shares are apparent if dividends and currency movements are allowed for or not - in particular in the big outperformance last decade and underperformance this decade.</p>
<p>Since October 2009 Australian shares have returned 8.4% pa compared to 10.4% pa from global shares in local currencies or 12.5% in Australian dollar terms (as the $A fell).</p>
<p><a href="https://www.propertyobserver.com.au/images/2019/8/1/share%20market%205.jpg" target="_blank">Click here </a>to enlarge: </p>
<p><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/8/1/share%20market%205.jpg" alt=""></p>
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<p><strong>What’s the outlook?</strong></p>
<p><span>Is the break out by the All Ords and ASX 200 to new highs sustainable? </span><span>Going through past bull market highs after a long period below can attract investors into the market so it could push on for a bit. </span></p>
<p><span>But after such a huge run </span><span>– </span><span>the market is now up 21% year to date </span><span>– </span><span>its vulnerable to a short-term correction: we are coming into a seasonally weak part of the year; the August earnings reporting season could result in volatility; and there are various risks in relation to trade wars, tensions with Iran and soft economic data. </span></p>
<p><span>However, the combination of low bond yields which means that the share market is comparatively cheap, monetary easing by the RBA and other central banks and a likely pick up in global growth by year end and Australian growth next year point to even higher share prices on a six to 12 month horizon.</span></p>
<p><span>In terms of the Australian share market</span><span>’</span><span>s valuation, its price to 12 month ahead consensus earnings multiple of 16.5 times is above its long-term average, but shares are known to trade on higher PEs when inflation and interest rates are low. </span></p>
<p><span>In fact, the gap between the forward earnings yield of 6.1% and the 10 year bond yield of just 1.2% is well above average making shares relatively cheap.</span></p>
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<p><span>Is the secular underperformance of Australian shares versus global shares over? </span><span>So far this year Australian shares have outperformed global shares and the various comparisons in the last chart have hooked higher. </span></p>
<p><span>Several of the factors that drove the relative underperformance this decade are fading:</span></p>
<ul>
<li>
<p><span>Much of last decade</span><span>’</span><span>s outperformance has been reversed. </span>Payback has happened albeit it could still go further.</p>
</li>
<li>
<p><span>The RBA is easing more aggressively.</span></p>
</li>
<li>
<p><span>The surge in the $A to $US1.10 of 2011 has reversed </span>making Australian companies more competitive.</p>
</li>
<li>
<p><span>The commodity price slump from their 2008-2011 highs </span>(depending on the commodity) looks to be over.</p>
</li>
</ul>
<p>Finally, the risks of a property crash dragging banks and the economy into recession may be receding.</p>
<p>The Australian dollar is still likely to fall a bit and it makes sense to maintain a decent exposure to global shares for portfolio diversification reasons. But with many of the negatives for the Australian share market fading it’s hard to maintain a strong case against it versus global shares.</p>
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<p><strong>Key points</strong></p>
<ul>
<li>
<p><span>The long time taken for Australian shares to regain their 2007 high and their underperformance compared to global shares this decade reflects a combination of payback after their strong performance last decade, tighter monetary policy, the strong $A into 2011, the slump in commodity prices and property crash phobia.</span></p>
</li>
<li>
<p><span>High dividend payouts are not to blame.</span></p>
</li>
<li>
<p><span>While the Australian share market is at risk of a short-</span>term pull back it’s likely to be higher on a 6-12 month horizon and its period of relative underperformance compared to global shares is likely at or close to an end.</p>
</li>
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<p><span><em><span>DR SHANE OLIVER</span> is the Head of Investment Strategy and Chief Economist at AMP Capital.</em></span></p>
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Australian shares hit record highs - is the decade long underperformance versus global shares over? Shane Oliver

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<p>EXPERT OBSERVATION</p>
<p>Aussie wealth remains elevated, but has eased back from record highs due to falling home prices.</p>
<p>But in a positive development, total household wealth (net worth) stabilised in the March quarter after the biggest fall in a decade in the December quarter. The Aussie sharemarket is acting as a wealth ‘buffer’ against the property downturn. In the March quarter, the S&amp;P/ASX200 index rose by 9.5 per cent – the strongest gain in 9½ years.</p>
<p>Foreigners have increased their allocation to Aussie listed shares this year. Foreign ownership of Aussie shares was hovering near 4-year highs at 31.3 per cent in the March quarter, up from 30.9 per cent in the December quarter.</p>
<p>The weaker value of the Aussie dollar against the greenback, a desire for iron ore exposure, attractive dividend yields, solid payout ratios and likely further interest rate cuts have boosted demand for Aussie shares. And the local sharemarket’s relatively defensive composition when compared to its China supply-chain exposed peers in Asia have made the ASX200 an attractive proposition as the global ‘chase for yield’ re-intensifies.</p>
<p>Looking ahead, Aussie per capita wealth is expected to consolidate around $400,000 after significant gains over the past five years, should home valuations continue to moderate. But property prices appear to have flattened in Sydney and Melbourne in June amid tentative signs of stabilisation.</p>
<p>And it remains to be seen whether the ASX200 index, up almost 18 per cent so far this year, can continue its blockbuster run towards record highs, especially with the company ‘confession season’ and earnings reporting season ahead in August.</p>
<p>Aussie share valuations look a little stretched with the Best Price/Earnings ratio straddling 3-year highs at over 17 times earnings.</p>
<p>And earnings per share growth is modest outside of the resources sector, but continued monetary and fiscal stimulus will continue to act as a support. Business confidence and investment is also expected to lift given greater policy certainty following the election. But trading conditions remain challenging given slowing domestic demand and US-China trade tensions.</p>
<p>Click <a href="https://www.propertyobserver.com.au/images/2019/6/27/Commsec%20shares.JPG" target="_blank">here</a> to enlarge.</p>
<p><img src="https://www.urban.com.au/images/2019/6/27/Commsec%20shares.JPG" alt=""></p>
<p><strong>What do the figures show?</strong></p>
<p><em>Financial Accounts:</em></p>
<p>Total household wealth (net worth) rose by 0.2 per cent to $10,242.6 billion in the March quarter after falling by 2.1 per cent to $10,225.9 billion in the December quarter. The record-high figure for household wealth was $10,422.3 billion in the September quarter of 2018. Over the year to March, net worth fell by 0.7 per cent.</p>
<p>In per capita terms, wealth fell by $1,512 in the March quarter to $404,556 following a record $9,993 decline in the December quarter – the third consecutive quarterly decline.</p>
<p>The Bureau of Statistics noted: “The increase in household wealth in the March quarter was driven by real (inflation adjusted) holding gains on financial assets, offset by holding losses on residential real estate.”</p>
<p><em>The percentage point contributions to the change in household wealth in the December quarter, include</em>:</p>
<p>Land and dwellings detracted 1.5 percentage points;</p>
<p>Financial assets contributed 1.8 percentage points;</p>
<p>Financial liabilities detracted 0.2 percentage points.</p>
<p>Households held a record $1,160.7 billion in cash and deposits at the end of March. Cash and deposit holdings represented 21.5 per cent of financial assets, down from 22.1 per cent in the December quarter and below the 21.8 per cent average since the global financial crisis and long-run average of 21.7 per cent.</p>
<p>Households held $1,015.7 billion in shares or 18.8 per cent of all financial assets in the March quarter, down from 18.9 per cent in the December quarter, but below the 19.3 per cent average since the global financial crisis and the long-run average of 22.6 per cent.</p>
<p>Pension fund (superannuation fund) assets rose by $119.9 billion to a record-high $2,320 billion in the March quarter. Cash and deposits stood at 10.6 per cent of financial assets, below the 12.9 per cent average since the global financial crisis, but above the long-term average of 9.4 per cent.</p>
<p>Foreigners held $604.8 billion of Aussie listed sharesin the March quarter, up from $548.1 billion in December, but below the record-high of $612.9 billion in the September quarter. Foreigners held 31.3 per cent of total listed shares – near 4-year highs - but slightly below the 31.6 per cent average since the global financial crisis and long-term average of 32.8 per cent.</p>
<p><strong>What are the implications for interest rates and investors?</strong></p>
<p>As evidenced by today’s wealth report, the Reserve Bank will be hoping that Aussie shares and bonds will continue to do the ‘heavy lifting’, shielding households from the downside risks associated with the property downturn, slow wages growth and the potential loss of momentum in the jobs market.  </p>
<p>Aussie bonds have been a strong performer over the year to May 31, up by 9 per cent (Bloomberg Australian Composite Bond Index 0+ Years), as government bond yields have fallen to record lows. Australia’s AAA sovereign credit rating and solid fiscal position has made sovereign bonds an attractive destination for risk averse investors.</p>
<p>But Aussie shares have been a star global outperformer, with the S&amp;P/ASX300 Accumulation Index up 10.9 per cent, ahead of global shares at 8.9 per cent (MSCI World Net Index) over the year to May 31 - an attractive proposition for foreigners seeking yield in a low growth, interest rate and inflation environment.</p>
<p>CommSec expects another rate cut in the next few months due to spare capacity in the labour market and economy.</p>
<p><em>RYAN FELSMAN is a Senior Economist at CommSec</em></p>
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j.ballantyne1990-6AQqhLzZaK

Foreign holdings of Aussie shares hits 4-year high: CommSec's Ryan Felsman

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<p>Investors, represented by Maurice Blackburn, are taking class action against construction giant Lendlease over its share tumble last November following a surprise $350 million write-down on its engineering business that includes the major Sydney road project.</p>
<p>The NorthConnex project is expected to be delivered six months after schedule, due for completion in 2020.</p>
<p>Investors who bought Lendlease shares between February 21 and November 8 can participate in the claim.</p>
<p>The delayed NorthConnex project in Sydney caused its share price plunge caused after revealing it was behind schedule on the multibillion-dollar road development.</p>
<p data-gtm-vis-recent-on-screen-6236702_632="403388" data-gtm-vis-first-on-screen-6236702_632="403388" data-gtm-vis-total-visible-time-6236702_632="4000" data-gtm-vis-has-fired-6236702_632="1">Maurice Blackburn will today begin taking registrations for the legal proceedings against the global developer.</p>
<p data-gtm-vis-recent-on-screen-6236702_632="403388" data-gtm-vis-first-on-screen-6236702_632="403388" data-gtm-vis-total-visible-time-6236702_632="4000" data-gtm-vis-has-fired-6236702_632="1">The law firm alleges Lendlease broke the Corporations Act by failing to properly inform its shareholders about serious issues in its engineering and services arm and by engaging in misleading and deceptive conduct.</p>
<p>Lendlease saw its shares tumble on the day of the write-down announcement to $14.25 after closing strongly on November 8 at $17.45.</p>
<p>The share fall wiped billions from the company's market capitalisation over a period of five trading days, The Sydney Morning Herald reported.</p>
<p> </p>
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Lendlease face class action after share price collapse

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<p>The number of people intending to retire in the next 12 months is estimated at 426,000, a 30% increase on the level seen in 2008 when it was 328,000, according to Roy Morgan Research.</p>
<p>Men currently represent 220,000 intending retirees and women 206,000, the research found. </p>
<p>Norman Morris, industry communications director at Roy Morgan, said additional pressures currently on retirement decisions are the declining real estate and stock market values which have the potential to delay retirement and encourage people to keep their jobs longer.</p>
<p>Morris suggests there will be more pressure on government funding with increasing financial pressures.</p>
<p>“The average level of savings and superannuation for those intending to retire in the next 12 months is well below what is required to be able to lead what the Association of Superannuation Funds of Australia (ASFA) describes as a comfortable lifestyle," Morris said.</p>
<p>"This will put more pressure on government funding for some time yet unless there are changes to eligibility rules, taxation or superannuation regulations.</p>
<p>ASFA estimates that an individual would need $545k and a couple $640k for a ‘comfortable lifestyle’.</p>
<p>Currently the average gross wealth of intending retirees is $331,000, up from $237,000 (40%) since 2008.</p>
<p>Click here <a href="https://meltwater-apps-production.s3.amazonaws.com/uploads/images/57312c304f003481ed1f1231/blobid4_1545011469884.png" target="_blank">to enlarge</a>.</p>
<p><img src="https://meltwater-apps-production.s3.amazonaws.com/uploads/images/57312c304f003481ed1f1231/blobid4_1545011469884.png"></p>
<p> </p>
<p>“Intending retirees who own or are paying off their home have a major potential source of retirement funding, and with its tax exempt status, they have a considerable advantage over renters, even if values decline," Morris added.</p>
<p>"To include the value of homes in retirement funding decisions is likely to take a major mind shift for many as the home is generally regarded as being sacrosanct and as such not to be involved in retirement funding.</p>
<p><span>A major problem facing the Australian government and individuals is how to fund the retirement of an ageing population.</span> </p>
<p><span>Up to now, superannuation has been playing an increasing role in retirement funding and currently represents 69% of the gross wealth of intending retirees, up from 53% in 2008, according to Roy Morgan.</span></p>
<p>Owner occupiers have a much higher potential source of retirement funding than renters. The average value of their homes has increased by 58% over the last ten years compared to only 37% for other investments.</p>
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jrobinson-rf4aSBido9

Over 400,000 Australians to delay retirement due to property market and share slump

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<p class="x_MsoNormal">EXPERT OBSERVER</p>
<p>Earlier this year analysis by RiskWise Property Research projected returns for shares, government bond yields and residential property would reach their lowest in 25 years.</p>
<p class="x_MsoNormal"><span>Unfortunately the research has been proven correct and the latest figures showed 2018 to be by far the worse and poorest year for returns for investors across the three major asset classes.</span></p>
<p class="x_MsoNormal"><span>Based on available data from CoreLogic since 1981 (the earliest point when valid data is available), 2018 is the first year in 37 years that two major asset classes (residential property and shares) delivered annual negative returns at the same time. In addition, government bonds only delivered less than 2 per cent return.</span></p>
<p class="x_MsoNormal"><span>This means in 2018 major asset classes delivered either negative or poor returns, well below the return of at least 5 per cent, as expected by investors under typical circumstances.</span> </p>
<p class="x_MsoNormal">The extremely unusual 2018 situation was due to a perfect storm of volatility and uncertainty in the financial markets, ultra-low interest rates and, besides a number of exceptions, negative growth in dwellings due to lending restrictions, the Banking Royal Commission’s findings and restrictions on foreign investments. </p>
<p class="x_MsoNormal"><span>Furthermore, with the looming Federal election and investor fears of the Labor Party’s proposed changes to negative gearing and capital gains tax, he said 2019 was projected to be a year of political uncertainty and economic volatility.<span class="Apple-converted-space"> </span></span></p>
<p class="x_MsoNormal">Falling property prices in Sydney and Melbourne have caused poor consumer sentiment in relation to housing.</p>
<p class="x_MsoNormal">Combined with ongoing weak wage growth, this is likely to have a flow-on effect during 2019 on the overall consumer sentiment and a negative impact on household spending and consequently on GDP growth.</p>
<p class="x_MsoNormal"><span> </span>What you expect in an ultra-low interest rate environment is continued growth in dwelling prices, however, the lending restrictions and fear over Labor’s policies have cooled the market and created an unusual situation of low house prices.”<span class="Apple-converted-space"> </span></p>
<p class="x_MsoNormal">Until the GFC there had been a good correlation between high interest rate environments (high-growth environments) to strong returns from shares, however, due to very strong volatility in the financial markets and ASX200 there was no clear correlation between interest rates to changes in the ASX.</p>
<p class="x_MsoNormal">The outlook would not improve in the immediate future with investors facing another tough two years, with the majority of properties likely to be depreciating assets in the short term.</p>
<p class="x_MsoNormal">Shares also show volatility and uncertainty and this is now even more of a territory for professional investors and fund managers.</p>
<p class="x_MsoNormal">The good news is that there are markets that carry a lower level of risk and are projected to deliver good overall return (i.e. capital growth and rental return) both in the short and long term, at a variety of price ranges.</p>
<p class="x_MsoNormal">These include houses in areas that enjoy high demand mainly in southeast QLD and regional areas in Victoria such as Geelong that still enjoys very good demand that translated into<span class="Apple-converted-space"> </span>15.1 per cent<span class="Apple-converted-space"> </span>capital growth for houses in the past 12 months.</p>
<p class="x_MsoNormal">High population growth and a rise in infrastructure projects, leading to an improved economy and more jobs, have greatly increased the popularity of the area. It is also only one hours’ drive from Melbourne and housing is significantly more affordable.</p>
<p class="x_MsoNormal">Another example where houses enjoy strong demand is Queensland’s Sunshine Coast that delivered<span class="Apple-converted-space"> </span>6.5<span class="Apple-converted-space"> </span>per cent capital growth in the past 12 months and<span class="Apple-converted-space"> </span>35.2 per cent<span class="Apple-converted-space"> </span>in the past five years. The lifestyle and strong demand from families, downsizers and investors make this place an attractive destination that holds well even in the current market conditions.<span class="Apple-converted-space"> </span></p>
<p class="x_MsoNormal">As more volatility was expected in the financial markets for 2019-2020, uncertainty around international major global events such as the US trade war with China, low interest rates and low growth, it was likely the trend of low returns would continue for the immediate future.</p>
<p class="x_MsoNormal"><em>DORON PELEG</em><em> is CEO of <a href="https://www.riskwiseproperty.com.au/Home/About" target="_blank">RiskWise Property Research</a>.</em> </p>
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First year in nearly four decades residential property and shares have delivered negative returns

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<div class="column">EXPERT OBSERVATION</div>
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<br>October was a bad month for shares with global shares losing 6.8% in local currency terms and Australian shares losing 6.1%. It’s possible that following top to bottom falls of 9% for global shares, 11% for Australian shares, 21% in emerging markets and even 31% in Chinese shares we have now seen the low in the share market rout. Shares were due a bounce and from their October lows and Australian shares have risen around 4%. But it’s impossible to be definitive and with the worry list around US interest rates, trade, politics, etc, there could still be another leg down. However, our view remains that recent turbulence in share markets is a correction or a mild bear market at worst (like 2015-16) rather than the start of a deep bear market like the global financial crisis. This note reviews the key recent worries for shares and why they are unlikely to be terminal.</div>
<div class="column"><strong> </strong></div>
<div class="column"><strong>US inflation &amp; interest rates</strong></div>
<div class="column"><strong> </strong></div>
<div class="column">The US economy is very strong as evident by consumer confidence at an 18-year high, unemployment at a 49-year low and strong economic growth. With spare capacity being used up wages growth is edging higher as evident in the next chart.</div>
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<p><span>Against this backdrop it makes sense for the Fed to continue the process of returning monetary policy and interest rates to something more normal. Naturally, the ongoing removal of monetary stimulus in the US creates consternation and has been periodically ever since former Fed Chair Bernanke started talking about slowing or “tapering” quantitative easing in 2013. In short, investors continue to fear a return to the GFC and so any move to remove monetary support creates periodic bouts of fear. Several points are worth noting about this though. First, the Fed can afford to remain gradual in raising rates. Inflation is at the 2% target, wages growth is a long way from the 4% plus level that preceded past recessions and productivity growth is rising so this will keep growth in unit labour costs down. Meanwhile, intense competition and technological innovation are also continuing to help keep inflation constrained.</span></p>
<p><span>Second, on any measure US monetary policy is a long way from being tight. The Fed Funds rate is zero in real terms, it’s well below nominal growth and the yield curve is still positive.</span></p>
<p><span>Finally, a return to more normal interest rates is a good thing because it reflects a stronger, more normal economy.</span></p>
<p><span>In short, expect gradual 0.25% Fed rate hikes to continue, with the next hike coming in December, and this will cause bouts of market volatility but it’s a long way from crunching the economy in a way that would bring on a deep bear market in shares.</span></p>
<p><strong>The US/China trade conflict</strong></p>
<p><span>This issue has been periodically worrying markets since around March. It stepped up a notch after last month’s speech by US Vice President Mike Pence indicating that US gripes with China extend beyond trade which led many to talk of a new Cold War – the implication of which is less trade and occasional military tensions which implies lower economic growth and lower price to earnings multiples. However, it’s still not as bad as it looks.</span></p>
<p><span>First, so far only 12% of US imports have been subject to a tariff hike averaging 15%, which is equivalent to an average tariff hike of 1.8% across all imports. So it’s a non-event compared to 1930 which saw a 20% tariff hike on all imports.</span></p>
<p><span>Second, while initially the US seemed to be picking trade fights with all major countries it has since renegotiated trade agreements with South Korea and Canada/Mexico and is negotiating with Europe and Japan. This tells us Trump is not interested in trade wars with everyone and that he is not anti- trade per se but wants “fairer trade” for the US.</span></p>
<p><span>Third, while Trump has threatened more tariff hikesonChina if it retaliates it’s noteworthy that China has not fully retaliated and </span>has been cutting tariffs and announcing more protections for intellectual property. This may help defuse the tensions a bit.</p>
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<p><span>Fourth, while Trump’s comments expressing optimism about a deal with China should be treated with scepticism as they came just before the US midterm elections, they do highlight cause for optimism that a deal will be reached eventually. At least Trump and Xi are talking and Trump’s optimistic comments ahead of the midterms effectively tells us that he is aware that the trade issue is harming the stock market and potentially the economy. The latter in turn suggests that he wants a deal well before he faces re-election n 2020. So, while it may be premature to expect a deal when Xi and Trump meet later this month, a deal is likely well ahead of the 2020 elections. With China already lowering tariffs, improving IP protections and softening joint venture requirements the outlines of a deal are starting to become apparent and Chinese Vice President Wang has indicated China is ready to negotiate with the US.</span></p>
<p><strong>The US midterm elections – no surprises</strong></p>
<p><span>The US midterm elections saw the Democrats win control of the House and Republicans retain the Senate which was what had been indicated by the polls and betting markets. So, it provided no surprises - in contrast to Brexit and Trump’s 2016 win! While the Democrat House is likely to prevent Trump from cutting taxes any further it won’t be able wind back last year’s tax cuts, reverse Trump’s deregulation of the economy or change his trade policy. But there is some chance that Trump and the Democrats may agree on infrastructure spending. While the Democrat House will likely set up committees to investigate Trump and consider impeachment charges, it’s very unlikely to get the required 67 out of 100 senate votes to remove him from office unless he is shown to have done something really bad. All up, while there may be some skirmishes around shutdowns and debt ceilings, the midterm outcome could be positive because it means less policy uncertainty.</span></p>
<p><span>On average the US resident has lost 29 House seats in his first midterm election. Clinton lost 54 and Obama lost 63. Trump looks to have lost around 34 but only needed to lose 23 to lose control of the House so what has happened is not unusual.What’s more the Republicans look to have increased their Senate majority so it’s not all bad for Trump. More broadly, it should be noted that “divided government” is the norm in the US. Perhaps the biggest risk is that Trump takes it personally and ramps up the populism, but if he wants to get re-elected in 2020 (which he does) then he won’t want to do anything that damages the economy and amongst otherthingsthis points to cutting a deal with China and getting the tariffs removed. Since 1946 the US S&amp;P 500 has risen in the 12 months after all midterm elections – probably because the president starts to focus on re-election and so tries to boost the economy.</span></p>
<p><a href="https://www.propertyobserver.com.au/images/2018/11/9/share%20market%202.jpg" target="_blank">Click here</a> to enlarge:</p>
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<p><strong>US tech stocks</strong></p>
<p><span>Having accounted for a big chunk of US share market gains this year the US tech sector has corrected around 13%, but that still leaves it vulnerable to relatively high valuations (Nasdaq is on a PE of 42 times), sales growth slowing down for some of them and the prospect of increasing regulation. However, we have not seen anything like the tech boom euphoria of around 1999/2000 so a crash like back then is unlikely. Our base case is that the US share market will start to see a rotation from expensive tech to cheap cyclical stocks (with many trading on forward PE less than ten times).</span></p>
<p><strong>Eurozone worries – German and Italy</strong></p>
<p><span>Fears that the Eurozone is about to blow apart causing financial mayhem threatening global growth has been with us since the Eurozone crisis that started in 2010. Lately the fear is that populist governments will take countries out of the Euro. This started with Greece in 2015. It was an issue last year but then pro Euro parties and candidates won in various elections. This year it’s been an issue with Italy particularly, as its populist government sought a wider budget deficit, and Germany with Angela Merkel indicating she will step down as Chancellor in 2021. In terms of Italy, there will no doubt be a conflict between the European Commission and Italy over the size of its planned budget deficit but don’t expect it to go too far as the deficit is not outlandish and German and France won’t want to embolden the Eurosceptics in Italy by pushing back too hard.</span></p>
<p><span>In terms of Germany, the poor performances of the governing German grand coalition parties (the Christian Democratic Union (CDU), the Christian Social Union and the Social Democrat Party(SPD)) at state elections do not signal a threat to the Euro. First, comments by SPD leader Nahles indicate the grand coalition is not under imminent threat. Second, Germany’s budget surplus and falling public debt indicate plenty of scope to provide fiscal stimulus, which would be positive for Germany and the Eurozone and provide an electoral boost for the grand coalition partners. Thirdly, German Euroscepticism is not on the rise. In fact, support for the Euro in Germany has risen to 83% and it was support for the pro-Euro Greens that surprised in Bavaria and Hesse, not support for the Alternative for Deutschland. Finally, a new election is unlikely as both the CDU and SPD have seen a loss of support, so they aren’t going to support an early election. So those looking for a breakup of the Euro can keep looking.</span></p>
<p><strong>Oil prices – back down again</strong></p>
<p><span>In early October world oil prices reached their highest since 2014 with West Texas Intermediate topping $US76/barrel with talk it was on its way to $US100 on the back of strong demand and supply threats including impending US sanctions on Iran. This in turn was adding to concerns about the impact on global economic growth and rising inflation. However, since then the oil price has fallen by nearly 19%. US sanctions on Iran have started but with little new impact as Iranian oil exports had already fallen and the US granted waivers to allow eight countries - including Japan, China, India, Taiwan and South Korea - to continuing importing Iranian oil. The Iranian export cutbacks at a time of threats to production from Venezuela and Libya leaves a now tight global oil market at risk of higher prices, but for now the threat has receded a bit.</span></p>
<p><span><span class="s1"><a href="https://www.propertyobserver.com.au/https://plus.google.com/110172465327488162875?rel=author"><em>SHANE OLIVER</em></a></span><span class="s2"><em> is head of investment strategy and economics and chief economist at </em><a href="https://www.ampcapital.com.au/home"><span class="s1"><em>AMP Capital</em></span></a><em> and is responsible for AMP Capital's diversified investment funds.</em></span></span></p>
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Rising US interest rates, trade wars, the US midterm election results, etc - should investors be worried? Shane Oliver

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<div>EXPERT OBSERVER</div>
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<div>A Royal Commission into financial services misconduct always had the potential to represent a tumultuous period for Australia's major banks.</div>
<div> </div>
<div>Emerging stories have ranged from the banal to the trivial, to the troubling and the downright nauseating.</div>
<div> </div>
<div>But for all that, there's been no 'smoking gun' to cause a collapse in share prices. </div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Interim report looms</span></strong></div>
<div> </div>
<div>Commonwealth Bank of Australia (ASX: CBA) has been battered more than most through the hearings, and not without reason, with a range of adverse findings coming to light. </div>
<div> </div>
<div>Since going ex-dividend in the second week of February the CBA share price took quite a tumble, inevitably leading an army of technical analysts to predict a breakout lower.</div>
<div> </div>
<div>But instead the opposite happened, with the share price now essentially back to where it was back in September last year before the hearings kicked off.</div>
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<div class="separator"><img src="https://4.bp.blogspot.com/-OeZDpihZ2x8/W0GM174x9EI/AAAAAAAAq9Y/vIXkIODQt1870GmY6MRTpm2ox4NCWGtewCLcBGAs/s640/CBA.jpg" width="640" height="376" data-original-height="797" data-original-width="1351"></div>
<p> </p>
<div>Some early disclosure here, I bought CBA in the $68-69 range (some of my general market thoughts and trade ideas are discussed on my Twitter feed - I also bought Telstra at $2.87 immediately before of the proposed restructure, but let's not talk about that). </div>
<div> </div>
<div>As the deadline for the interim Royal Commission report looms, the CBA share price has gained more than 12 per cent since mid-June.  </div>
<div> </div>
<div><strong><span style="text-decoration: underline;">Ruthless efficiency?</span></strong></div>
<div> </div>
<div>It's worth noting that with a PE ratio hovering around 13 and a price-to-book of about 2, the market is not pricing in significant downside for CBA, nor for that matter its industry peers. </div>
<div><span> </span></div>
<div><span>This likely reflects the benign level of mortgage arrears and the improving labour market outlook. </span></div>
<div><span> </span></div>
<div>
<span>There may have been a relative shift in sentiment between residential property and equities helping to drive the S&amp;P ASX 200 to a 10½ year high, although what this means for bank valuations may be somewhat reflexive given that the banks have heavy exposure to mortgages.</span><br><span><br></span><span>Markets might also be assigning the Coalition a marginally higher chance of election success on the back of its personal income tax cuts policy, although betting markets aren't much moved. </span>
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<div><span> </span></div>
<div>The major banks do continue to grapple with a potential loss of market share. </div>
<div> </div>
<div>Of course, markets are not always rational, but they normally are, and <span>they're usually more efficient than many people seem to think.</span>
</div>
<div><span> </span></div>
<div><span>And the market voting machine is presently judging that the four major banks will emerge from the Royal Commission a little bruised but relatively unscathed, with the hapless AMP bearing the brunt of share price pain. </span></div>
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pwargent-M4siyDbqQY

Bank share prices will emerge from Royal Commission bruised but relatively unscathed: Pete Wargent

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<p>Office, retail and industrial property returns have outpaced those from the stockmarket, according to a new report.</p>
<p>The average annual return on commercial property was 12.2 percent for the September 2016 quarter according to the Property Council/IPD Australia All Property Index, with the ASX 200 a total return of 7.58 percent.</p>
<p>Dr Anthony De Francesco, executive director of MSCI told the Australian Financial Review rising bond yields and some poorer performing property fundamentals could further ease the returns in commercial real estate.</p>
<p>"A key risk factor for the property sector is the prospect of a narrowing cap rate spread to the bond rate if we see tightening interest rate cycle in the near term," he said.</p>
<p>"Another risk factor is the generally soft space market fundamentals which have not translated into strong net operating income growth."</p>
<p>"A key driver of capital return had come been the firming in capitalisation rates.</p>
<p>"This is continuing, although signs are emerging of cap rates starting to stabilise and even soften across some sub-sector markets.</p>
<p>"We've seen steep cap rate compression over the last few years, which has delivered very firm cap rates across all property sectors. In fact, pricing within the property market is now far more aggressive than at the peak of the market before the GFC hit.</p>
<p>"Back then, the overall cap rate for commercial property stood above 6.3 percent. Now it sits at six percent."</p>
</div>
<p> </p>
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