Market update

Well, we’ve seen an immediate impact on housing. You’ve seen a big drop in housing clearance rates and so people having difficulty selling their houses, big gap between buyers and sellers. When we’ve spoken to real estate agents and mortgage brokers, you’ve seen about 30, 40% drop in mortgage applications. So big declines. And that obviously has a big impact on the economy given the percentage of the economy tied into housing. We’re seeing a big drop in consumer confidence as well. And I think the thing that’s interesting when you look at Australian housing, we all know it’s expensive. I mean, it’s a big part of the political debate, but the affordability of a mortgage in Australia is higher than it was in Japan in 1990 or Ireland in 2007, which they were big bubbles in those markets at those times. So it is vulnerable when that bubble gets pricked to see the outcome of that.

And I think the other thing from a budget perspective is the government sort of tied themselves up in a little bit of a knot because very aggressive spending means that we have seen higher inflation, higher interest rates. And as they look to contain that spending, that spending’s been driving a lot of the employment, but we haven’t seen a lot of productivity growth. So GDP per head in the population has been declining for the last five years. So we’re in a little bit of a tight spot domestically I think that we need to navigate through and that’s presenting challenges.

Well, the really interesting thing is that when we look at the budget and we look at those areas of the market that are affected by the budget, they’re some of the areas that are most expensive when we look at valuations across our index. We look at this chart here, highlights the value of the big seven stocks. These are the biggest seven industrial stocks on our market and we compare them to other industrial stocks. Now historically, the other stocks would trade at a bigger premium to these big seven because they’re slower growing companies. They often have more debt attached to them. And typically they’ve traded at a 45% discount to the other industrial stocks. Right now they’re at a 15 to 20% premium. And the reason they’re at that premium is largely due to the MySuper changes. You’ve seen a lot of buying by industry funds as they look to replicate the index.

That’s been forced upon them by virtue of some of those MySuper laws. So this has created a negative cycle where those large stocks get bid up because they tend to be underheld by many active managers and it’s created some really unsustainable valuations at this point.

Yeah. We’ve been talking about the banks for some time and they really stand out. I think anything housing related, you need to be a little bit cautious of in this environment with housing volumes rolling off so sharply. The bank’s talking about your mortgage applications being down 20%. So they’re going to see a slowdown in loan growth. They’re also going to start competing more aggressively for those loans. You’ve seen CBA cut their mortgage rate by about 0.1 of a percent and you’ve also potentially seen a little bit of an increase in bad debts. You saw Judo sort of smaller SME bank lender have some higher bad debts come through and that’s got some potential to roll through to other banks as well. So given their valuation, given what’s happening in their external environment, it seems like a really easy place to avoid at present. And I think you could apply that to some other housing related stocks as well, some of the housing related retailers as well.

Then when we think about opportunities, we’re looking at global growth stocks, some stocks which typically are very strong growth trading at significantly cheaper multiples in history. Stocks like car sales, very strong, dependable grower over the last 20 years and continues to have a very solid growth outlook trading at its cheapest for about 20 years. So that seems like a pretty solid opportunity and likewise aristocrat as well. It’s been a very strong performer globally, particularly in the US where they’ve taken market share for the past 15 years and they’re continuing to perform very well with some very strong performing games. And again, they’ve been trading at a much cheaper level than they have done historically. I think the second area that we’re thinking about is resources. I mean, there’s a very strong demand story coming through from electrification of the grid when we use of EVs, use of battery storage.

When we think about defense spending, the usage of drones, when we think about AI and the demand for power, the demand story looks much stronger than it has done for quite some time. And supply still has constraints in many commodities. So I think there’s opportunities across resources. And then finally, there’s just some bespoke stocks that are trading at discounts. We certainly, we look for some defensive positions in Australia, a stock like Cleanaway, company like Cleanaway, which has a very enviable position across the Australian market, very difficult to replicate their assets, their landfill sites, their collection sites, the range and breadth of their contracts, which gives them a fairly strong position in the market. And again, they’re trading at the cheapest they’ve been for 15 years. So I think there’s some really interesting opportunities. There’s some expensive pockets of the market, tend to be those ones which are big index positions and often they’re exposed to the negative impacts of the budget changes, but we can tailor the portfolio to really target some of these interesting stocks that are trading at very attractive valuations at present.