Market Updates & Videos from AMP Capital


Original source: AMP Capital 

 

US missile strike against Syria: market implications

While the US missile strike against Syria in response to a chemical attack on its civilians caused a bit of uncertainty in financial markets, it looks to have been trivial and short lived as has been the case in the past in response to limited military strikes and most terrorist attacks.

This is likely to remain the case as the strike was highly targeted and proportional to the chemical attack and does not signal increased US involvement in Syria. One thing it does tell us though is that the US is not withdrawing into isolationism under Trump as some feared and that is a good thing.

Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital explores this issue in the video below.


 Shane Oliver

Dr Shane Oliver has extensive experience analysing economic and investment cycles and how current positioning affects the return potential for asset classes such as shares, bonds,  property and infrastructure. Shane is a regular media commentator, providing economic forecasts and analysis of key variables and issues that affect all asset markets.

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.


Global investment is far from peaking

In the video below, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital asserts that where we are in the global investment cycle is critically important. There is no sign of overinvestment globally – in fact there has been too little investment.

Global monetary conditions remain easy and in the absence of broad based excess (in growth, debt, or inflation) look likely to remain accommodative. The US Federal Reserve (Fed) is likely to hike rates more aggressively this year but it’s still from a very easy base and other central banks (including the Reserve Bank of Australia) are either on hold or easing. Therefore, a shift to tight money that brings an end to the economic cycle looks a fair way off.

While short-term investor sentiment is excessively bullish, long term measures of positioning are not. In the US, the large investor flows into bond funds over the past few years have yet to reverse in favour of shares. Overall, we are still not seeing the signs of excess, euphoria and exhaustion that typically come at cyclical economic and sharemarket peaks. Barring some sort of external shock, the cyclical bull market in shares looks like it still has further to go – particularly if global economic growth returns to more normal levels which in turn will help earnings.

Outlook for Australia

In Australia, we expect continued strength in business conditions with gross domestic product (GDP) growth averaging around 3% over the next few years. Sentiment towards shares as a wise destination for savings remains low and investors still prefer bank deposits.

National residential property price gains are expected to slow to around 3-4% this year, as the heat comes out of Sydney and Melbourne and rising apartment supply hits. Commercial property and infrastructure are likely to continue benefitting from the ongoing search for yield, but this demand may wane over the longer term as bond yields trend higher.

What does this mean for investors?

While market corrections should be anticipated – with US-president elect Trump and upcoming Eurozone elections being potential triggers – we still appear to be a long way from the peak in the investment cycle.

 Shane Oliver

Dr Shane Oliver has extensive experience analysing economic and investment cycles and how current positioning affects the return potential for asset classes such as shares, bonds,  property and infrastructure. Shane is a regular media commentator, providing economic forecasts and analysis of key variables and issues that affect all asset markets.

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

Australian housing: Vulnerable but not crashing

The big picture view on Australian residential property is well known: Australian housing is expensive by global standards and the surge in home prices has gone hand-in-hand with a surge in household debt.

In the video below, Shane Oliver, AMP Capital’s Head of Investment Strategy and Chief Economist provides an update on Australian housing.

Key points

  • Expensive housing and high household debt leave Australian housing vulnerable; but without a recession or much higher interest rates a property crash is unlikely.
  • The surging supply of apartments and the continuing strength of the Sydney and Melbourne property markets pose an increasing risk. Average dwelling prices in these cities are likely to see another cyclical 5-10% price downswing around 2018, with unit prices in oversupplied areas likely to decline 15-20%.
  • The combination of high house prices, huge gains in Sydney and Melbourne, low rental yields and a coming surge in the supply of apartments mean property investors need to be careful. It is best to focus on undersupplied, less-loved parts of the property market.

Crash remains unlikely
Nationwide price falls are unlikely until the Reserve Bank of Australia starts to raise interest rates again and this is unlikely before 2018 at which point we are likely to see a 5% or so pullback in property prices as was seen in the 2009 and 2011 down cycles. Anything worse would likely require much higher interest rates or recession both of which are unlikely.

However, the risks on the supply front are clearly rising in relation to apartments where approvals to build more apartments are running at more than double normal levels. Apartments in parts of Sydney and Melbourne are probably least attractive but for those who want to look around there are pockets of value.

What does this mean for investors?
Over the very long term residential property adjusted for costs has provided a similar return to Australian shares. Its low correlation with shares, lower volatility but lower liquidity makes it a good portfolio diversifier with shares. So there is clearly a role for property in investors’ portfolios.

Final thoughts
There remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth.

Shane Oliver

Dr Shane Oliver has extensive experience analysing economic and investment cycles and how current positioning affects the return potential for asset classes such as shares, bonds, property and infrastructure. Shane is a regular media commentator, providing economic forecasts and analysis of key variables and issues that affect all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.


4 reasons why listed real estate is now safer if a downturn hits

10 January 2017
Jamie O’Donnell  Portfolio Manager / Analyst, Global Listed Real Estate

4 reasons why listed real estate is now safer if a downturn hits

 

 

 

 

 

 

 

Advisers who moved their clients into listed real estate after the GFC made a brave call, given that investors in the sector suffered terribly during the economic turmoil.However, in the last five years, those clients who were invested in the listed real estate sector have benefited from strong total returns. Notably, global listed real estate has outperformed the majority of other asset classes for eleven of the last 15 years and has significantly outperformed global equities since the height of the GFC in March 2009.The economic recovery following the Global Financial Crisis (GFC) naturally boosted demand for real estate, whilst at the same time, the reluctance of banks to fund speculative development has generally kept new supply in check. This demand/supply dynamic helped to drive capital growth. Meanwhile, regular rental income which supports the yield component of global listed real estate has proven to be attractive for investors, particularly against the backdrop of very low interest rates.And yet, if global listed real estate is indeed correlated to the performance of the global economy, conventional wisdom would suggest that it should underperform in the event that the bear case of a global economic slowdown does come to pass – as the sector did during the Financial Crisis.

We therefore think it is timely for advisers to perform a stress test on global listed real estate and to reassess the resilience of the sector as an investment class should an economic slowdown materialise.

Has the sector learned from its previous painful mistakes?

We believe that the sector is much better prepared and has heeded the bitter lessons learnt during the last global economic slowdown.

There are four key factors that support the notion that global listed real estate offers resilience.

1. Financial leverage is much more disciplined

Leverage was clearly a significant factor in the relative underperformance of listed real estate during the GFC. In many cases, real estate companies were over-levered and exposed to an economic downturn.

At the start of 2008, US REITs had an average leverage ratio of around 60 per cent. Debt to EBITDA multiples were around 7.5 times, rising to 8 times in late 2008 to 2009.

When debt markets effectively closed during the GFC, many listed real estate companies were close to breaching debt covenants and faced difficulty refinancing near-term debt. They were forced to either raise equity at deep discounts or offload assets.

In contrast, the average leverage ratio of US REITs today is around 30 per cent – roughly half what it was at the peak of the GFC. The debt to EBITDA multiple has also been cut by 25 per cent, falling from around 8 during the GFC to 6 today.

We believe that leverage is likely to stay in check or even trend lower as asset values continue to grow and companies sell into a very strong capital market.

This all suggests that the sector is much better positioned with respect to leverage and would be unlikely to suffer the same level of distress as previously experienced during the GFC.

A recent example supports this thesis – in the immediate aftermath following the UK’s decision to leave the European Union in June 2016, the UK REITs declined by around 20% per cent. However, once it became clear that the REITs would not necessarily be forced sellers of assets nor be forced to raise equity, most of those losses were regained.

2. Reduction in development risk

The magnitude of development exposure (or risk) on the balance sheets of listed real estate companies is also lower today than prior to the GFC. In addition, the nature of this exposure has changed with a reduction in the higher risk, so-called “speculative” development component of the overall development book.

Since the depths of the GFC, banks have been less willing to lend for development, particularly speculative development. That has had the effect of holding the supply of global real estate in check. Whilst supply is expected to pick up over the medium term, it is from a relatively low base and considerably below the long-term average.

3. Payout ratio headroom

The third factor underscoring the defensive positioning of global listed real estate today is that of payout ratios. Prior to the GFC, payout ratios in the US were around 85 per cent. In contrast, the present payout ratios in the US are at near historic lows of around 72 per cent.

This is important for two reasons. Firstly, a lower payout ratio reflects a greater focus on financial discipline including strengthened balance sheets and cutting the heavy reliance on debt to finance acquisitions and capital expenditures.

Secondly, headroom in the payout ratio also suggests that current dividend yields are sustainable, and that listed real estate is in a healthier position than has been the case in the past, particularly in the lead up to the GFC.

4. A new pillar of demand with the emergence of sovereign wealth funds

Sovereign wealth funds are playing an increasingly important role in global real estate.

The representation of sovereign wealth funds in global commercial real estate transactions has grown from less than 1 per cent in 2011 to 6 per cent in 2015. The proportion of the funds investing in the asset class has increased by almost 10 per cent in the past two years alone, a trend likely to continue given that on average, these funds remain underinvested relative to strategic targets.

Sovereign wealth funds are long-term oriented, patient capital, and most importantly, are driven by equity rather than debt. The mandates of these funds often restrict the use of leverage and as a result, these investors are relatively insulated from the type of stress in credit markets that exacerbated the fall in real estate values during the GFC.

Meeting expectations

In the event of a global economic slowdown, listed real estate companies will not be completely immune. However, we believe that the sector has taken important steps to insulate itself to a far higher degree compared to the period prior to the GFC. This is manifest is greater financial discipline, less speculative development, more headroom in payout ratios, and new pillars of long term demand for real estate from sovereign wealth funds.

The end result is an investment class that is positioned to deliver what is expected of it: real estate-like returns over the long term, with the benefit of both liquidity and diversification.

Advisers should gain confidence from this scenario.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.


Investment & Market update videos from AMP Capital

  • Investment and market update videos from AMP Capital. We are a leading investment house with a heritage and strength in real estate and infrastructure as well as contemporary solutions in fixed income, equities and multi-asset portfolios

 

About AMP Capital

AMP Capital is a leading investment house with over $145 billion1 in funds under management. We have a heritage and strength in real estate and infrastructure, and specialist expertise in fixed income, equities and multi-asset solutions. Our experience and leadership across asset classes not only provides insights into ever-changing markets, but also means we are at the forefront of developing contemporary investment solutions for clients.

Delivering outstanding investment outcomes is at our heart

Delivering outstanding investment outcomes is at our heart

Since we started life back in 1849 as the investment management arm of AMP Society, our commitment to delivering outstanding investment outcomes for our clients has been at the heart of everything we do.

Experience has taught us what matters most

Experience has taught us what matters most

With more than 160 years’ experience managing clients’ money, we’ve learnt what matters most – that is, to build the trust of our clients. We’ve always believed that some of the best investment opportunities are created by truly understanding our clients’ needs. It’s this philosophy that explains the range of ‘firsts’ we’ve achieved on behalf of our clients, and why we’ve been at the forefront of developing contemporary investment solutions.

The whole is greater than the sum

The whole is greater than the sum

We believe in expert investment teams coming together to discover the best possible insights and investment opportunities for our clients. With more than $145 billion1 in assets under management, AMP Capital’s story is more about our clients’ successes than our own.

AMP Capital story


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