Market Matters Morning Report Thursday 14th July 2016

Morning Report 14/07/2016

Market Matters Morning Report Thursday 14th July 2016

What's best today, banks or property?

Australian retail investors enjoyed a love affair with these two assets and during these uncertain times, we thought a simple comparison / evaluation would be beneficial to many subscribers. With interest rates continuing to fall, the chase for yield is again gaining momentum. When we look at property, we will consider both the REIT's sector of stocks and traditional "bricks & mortar". We would like to stress that while we are home owners, we are not active investors in "bricks and mortar,” hence our opinion will be based on simple broad statistics and observations.

Banks have been a significant laggard in the recovery of equities during 2016, primarily due to APRA capital requirements, rising bad debts, concerns around property prices, lower interest rates hurting margins, a weak Australian economy ex-mining boom and overall, no company growth.

Importantly, banks are "on the nose" to the market at present, being priced for a significant proportion of the above headwinds to become reality, hence prices are depressed. In line with current market pricing, if the banks could again start growing dividends by a few percent, the share prices should make all-time highs!

Commonwealth Bank (CBA) is regarded by many as the safest / best run of our "Big four" banks, making it the logical candidate to us for comparison. CBA is 22% below its highs of 2015 and is yielding 5.6% fully franked. We believe under $75, CBA is good value with both capital gain and a solid yield likely over the next 6 months.

Commonwealth Bank (CBA) Quarterly Monthly Chart $74.89

Unlike the banks, the REIT's (Real Estate Investment Trusts) are trading at fresh all-time highs since the GFC. They have enjoyed an excellent run, strongly assisted by falling interest rates. The REIT sector is currently priced for ongoing dividend growth and if this fails to materialise, or noticeably slows, the shares are likely to experience a significant correction.

Westfield Corp (WFD) is the matriarch of the sector and has just hit our targeted $11 area. Currently, WFD yields 3.16% with no franking - well under CBA. Technically, we can see a retracement to the $9 region ahead for WFD.

Westfield (WFD) Monthly Chart

"Bricks and mortar" is obviously not a liquid traded commodity, with significant costs to entering and exit. Interestingly, it’s these transaction costs that often benefit returns generated by property, as investors are forced to be patient and give their investments time to bear fruit. Remember Warren Buffets quote:
"The stock market is a device for transferring money from the impatient to the patient."

Currently, Australia's major cities are about to experience an oversupply of units / dwellings and from a simple economic standpoint, this is not good news for price. We would not be investing now, but simply sitting back for 6-12 months to see how this oversupply impacts prices plus the recent tougher regulations to borrowing.

Summary

Currently, our favourite assets class out of the 3 are banks shares. We would be switching from REIT's to banks at current levels.
We believe banks are especially attractive to sophisticated investors who can write calls to increase the overall yield.

Overnight Market Matters Wrap

The US markets appeared to take a breather last night, with the S&P500 managing to make a new intraday high before finishing square, whilst the Dow managed to eke out a small gain. The Dow finished up 24 points (+0.1%) to 18,372 and the S&P500 closed just 0.3 points to 2,152.43.
Oil continues to prove to be erratic with another down day after Crude inventories fell just 2.5m barrels for the week ending 8th July. This was against an expected decline of 3.0m barrels expected (again the experts were wrong). This set the tone for the day and oil fell US$1.69 (-3.6%) toUS$45.11/bbl.
Gold was back in favour last night with the price finishing up US$8 (+0.6%) to US$1,343/oz
The September SPI Futures is indicating the ASX 200 to open moderately stronger this morning, up 20 points to the 5,408 level.

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 14/07/2016. 9:00AM.

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