Market Matters Morning Report Thursday 7th July 2016

Morning Report 07/07/2016

Market Matters Morning Report Thursday 7th July 2016

Potential ramifications of UK Property Funds being frozen

BREXIT has produced its first two standout casualties with the British Pound plunging ~13% and a number of UK Property Funds now closing their doors. The UK Property Fund Management sector is worth around $25bn and with 6 funds now closed for redemptions (locking investors in) we now have ~25% of the industry in limbo.

Decisions must now be made by these fund managers as to whether they sell assets or borrow money to fund redemptions. Borrowing increases the gearing for the remaining investors, while selling assets at an inopportune time is also not ideal - the likely outcome is a combination of the two. As we’ve written in the past, this does have a bit of the ‘GFC vibe’ about it, and should refocus attention back on the benefit of holding liquid investments. Unfortunately retail investors in these funds are starting to panic, and with the underlying asset (property) being illiquid, it may take some time for the damage to be clarified. Historically when retail investors start to panic it’s time to commence buying.

In all likelihood, property prices will fall in the UK over the coming year, as the instability around future deals with Europe creates uncertainty for business, resulting in a lack of investment. The obvious outcome here is lower occupancy for commercial property and hence lower rental returns over time which impacts asset prices. Residential London is currently building ~50,000 mainly upmarket homes and if you believe Jamie Dimon, CEO of Goldman Sachs, they’ll be fewer bankers residing in the city.

Currently the iShares UK Property ETF is down under 10% post BREXIT which we feel is a controlled reaction. Our view remains that with the British Pound down well over 10% in recent weeks, the appeal of UK property has improved. A lower currency overlayed by forced sellers seems likely to attract opportunistic overseas capital.

iShares UK Property ETF Chart

The implication for Australia is pretty clear; if global property funds are focussed on deploying capital into the UK, it may put some pressure on the strong Australian market. Right now, ASX listed property stocks trade at a combined 40% premium to the value of their assets, which is less than the 80% premium pre-GFC, however still extraordinarily high. This clearly is a function of low interest rates, which may persist short term, but eventually, this trend will change.

The Australian Real Estate Index is up over 100% since the GFC and many economists are forecasting the $A will drop from today's 75c area towards 60c. Why not sell Australia and buy the weakness in the UK property market?

Technically we are bearish the Australian Property Sector calling a 15% correction.

ASX200 Real Estate Index Monthly Chart

We have been targeting the $11 area for sector heavyweight Westfield prior to a significant correction, we maintain this view are sellers of WFD.

Westfield Corp (WFD) Monthly Chart

Henderson Group (HGG) which is in the Market Matters portfolio was one of the companies to suspend redemptions from its UK property fund last night. This is no surprise considering its recent aggressive share price fall.

We continue to believe the recent 35% fall in HGG is significantly overdone, is being used as a proxy to go short the UK economy/currency and if we had no position would buy weakness today. We do own the stock however, and are still considering averaging our position up to 10% weighting today looking for a $1 rally minimum.

Henderson Group (HGG) Monthly Chart

Summary

We remain bullish equities over coming months, particularly US stocks which had another solid session overnight.
We do not believe the UK's property issues are comparable to the sub-prime issues pre-GFC, and will be viewed upon as an opportunity by many international managers
We like to be buyers of panic and UK property may become just that in 2016 BUT we are sellers of the Australian property stocks like WFD seeing better value and risk/reward elsewhere.
Watch out for HGG which we may average today into significant weakness.

Overnight Market Matters Wrap

The US markets closed higher, overcoming a weaker lead from Europe, with the Dow finishing the day up 78 points (+0.4%) to 17,919, whilst the S&P500 closed up 11 points (+0.5%) at 2,099.
Oil was the main catalyst helping the market, with the price recovering from yesterday’s down day (-4.5%). Crude finished up 83c (+1.8%) to US$47.43/bbl. US inventories will be released in the early hours of tomorrow (AEST).
Gold traded at two-year highs, with traders still seeking safety after the Brexit vote and weak equity markets. Gold finished up US$8.40 (+6%) to US$1,367.10/oz.
The September SPI Futures is indicating the ASX 200 to open up 42 points, hovering near the 5,240 level this morning.

Regards,

The Market Matters Team

Level 12 28-34 O'Connell St

Sydney, NSW 2000

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 7/07/2016. 9:00PM.

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself or if you require a personal recommendation, you can seek the assistance of a financial adviser. Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports.

If you rely on a Report, you do so at your own risk. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.

To unsubscribe. Click Here