The Bell Has Rung on the REIT Sector

They say no one rings a bell at the top. But if the article below is anything to go by, then maybe that was good old Quasimodo I heard the other day, swinging on the ropes, setting the belltower alight with sound.

I’ll explain which sector I’m talking about in a moment. But first, let’s have a look at the overnight action. The S&P 500 rose 0.65%, while the Dow was up 0.54%. Gold rose a few dollars, and Brent crude was up nearly 1%.

Everything is as it should be in the world of central bank controlled markets. The Fed is once again triumphant in steering markets higher…for now at least.

But, as I said yesterday, the important thing to look for here is how the main US indices perform as they make another attempt at the all-time high.

A new high on a surge in volume would be good. But if the rally fades around the highs on lower volume, that would be a warning sign. It would increase the probability that the market is about to take another leg down.

Let’s see how it plays out over the next few weeks…

In the meantime, if you want to play the Fed-induced rally, check out small-cap specialist Sam Volkering’s latest research. Sam’s track record at picking little stocks that deliver big gains is pretty impressive. Click here to see his latest research…

While the market is happy celebrating a timid Fed, one major sector in the Aussie market doesn’t look particularly healthy. Since being decimated during the 2008 credit crisis, this sector has bounced back strongly to once again become a ‘market darling’.

I’m talking about the REITs — real estate investment trusts. But the recent price action hasn’t been at all inspiring. Then, a few days ago, I came across this in The Australian

Hospitals, car yards and college dorms used to be the ugly ducklings of Australian real estate — shunned by the big domestic property trusts in favour of glitzy office towers and big-box retail malls offering better returns.

Not any longer.

An influx of capital from foreign investors, including Middle East sovereign-wealth funds and Asian property trusts, has shifted the competitive landscape in Australia, pushing up prices for commercial property and forcing many local real-estate investment trusts, or REITs, to expand their horizons in search of yield.

The good old search for yield…

With the share prices of high quality trusts heading south, I can only imagine how these newfangled vehicles will fare.

So what’s going on with the sector?

Well, the search for yield seems to have gone cold…very cold. Let’s have a look at a few share price charts, shall we?

Top 50 Stocks on the ASX

The following stocks are among the largest companies in Australia. They are all in the top 50 stocks on the ASX.

First up is Scentre Group [ASX:SCG]. This REIT holds the Westfield retail assets. Up until the start of August, it was having a great year. From late September 2015 until then, the share price had climbed 42%. Who needs yield when you can get a capital gain like that?

Scentre Group


Source: BigCharts
[Click to enlarge]

The answer to that question, I suppose, is people who need an income to live on, but can no longer invest conservatively thanks to the RBA cutting rates a few more times in 2016. The REITs have been the major beneficiaries of post-2008 central banking idiocy.

But SCG’s share price recently cracked lower. And it looks to be more than just a minor correction. This looks like a change of trend taking place.

It’s the same with Vicinity Centres [ASX:VCX], formerly known as Centro Property Group. The share price peaked in late July, but has now turned sharply lower. As you can see by the crossover of the moving average lines in the chart, the medium term trend looks like it’s in the process of turning down.

Vicinity Centres


Source: BigCharts
[Click to enlarge]

I won’t bore you with anymore charts. But I can tell you that the whole sector looks like this to varying degrees.

I can’t really explain why, other than to say that prices went too high as investors got completely carried away with the search for yield, and forgot what they were looking for. If that is the case, this could be just a one-time adjustment, and share prices should stabilise from here.

But I think it’s a low probability play to buy here hoping to see a rally back to the old highs. You might get lucky. Or you could be stuck with a stock that keeps trending lower. This is a sector I’d avoid for a while.

I mentioned before that the share price surge (until recently) was a product of the RBA cutting rates a few more times this year. While this is a common sense explanation, the new RBA boss, Philip Lowe, doesn’t agree. In his first public remarks at the helm of Australia’s central bank, Lowe had this to say, as reported by the Financial Review:

Some of his most controversial comments centred on the property market, where he said prices were being driven higher by the lack of good supply and access to credit, and not because of official interest rate cuts that only generate “ripples”.

Describing the housing market as more stable than it was a year ago, when credit growth was surging, Dr Lowe claimed the May and August rate cuts don’t appear to have “stimulated a new round of house price increases”.

“In fact, house price growth has slowed over the course of the year, and I think that is good.”

Part of the job description of being a central banker is having the ability to exhibit plausible deniability. Or in this case, implausible deniability.

So cutting interest rates to all-time lows has only caused a ‘ripple’ in prices? Lowe clearly hasn’t been to an auction in the ‘burbs of Sydney or Melbourne lately. Maybe he needs to get out a bit more.

Cheers,

Greg Canavan,
For Markets and Money


Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

 


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