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Outlook for Aussie property and shares: Will the bull market continue?

Anthony Fensom  |  20 Apr 2021Text size  Decrease  Increase  |  
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Australian residential property is seeing its biggest price gains in three decades while the stock market nears record highs.

The latest house price data shows the covid-19 pandemic inflicted only a temporary chill on the sector. CoreLogic’s monthly property price index posted a 2.8 per cent national gain in March, its fastest rate of growth since October 1988.

All the capital city markets have returned to pre-pandemic highs. Only inner-city apartments have lagged amid the continued absence of overseas tourists and students.

Meanwhile, the local bourse has surged past its pre-pandemic level, climbing above the psychological barrier of 7,000 as investors back sectors seen benefitting from the expected global economic recovery.

As of close of trade on 20 April, the benchmark S&P/ASX200 index had posted a standout one-year return of 39.3 per cent, although lagging the stunning 62.37 per cent rise of the tech-heavy US Nasdaq composite index or the 48.91 per cent gain of the benchmark US S&P 500 index.

With ultra-cheap money inflating asset prices across the board, and supply failing to meet the demands of hungry property buyers, how should investors respond?

Australian shares 'overvalued'

Morningstar equity analysts advise investors to exercise caution. The technology sector is seen as the most overvalued, according to Morningstar's latest equity market outlook, while energy is the only undervalued sector.

“We see the share market as around 10 per cent overvalued on average at the moment, although there are pockets that aren’t as stretched as others,” said Morningstar’s head of equities research, Peter Warnes.

“The one-year forward PE [price/earnings ratio] of the market is nearly 19 times, which is 30 per cent over the long-term trend. It’s pushing into territory where the margin of safety is very, very thin.

“There’s no doubt in my mind that EPS [earnings per share] growth will slow sharply in 2022 after the pull through in 2021 and you’ll only be looking at high single digit growth.”

ASX

Warnes notes the risk of a “black swan” event, such as geopolitical tensions or another global pandemic, along with the Biden administration’s planned tax hike and risks of rising inflation.

“If we do see a global recovery it will put upward pressure on commodity prices, which will then feed into higher inflation. We saw this in the latest US PPI [producer price index] data, which was the highest since 2011,” he said.

“As the IMF [International Monetary Fund] said, keep your eye on US long-term bond yields. If they do rise, that could signal a disorderly unwinding of risk asset prices.”

The gains could continue too, with a record high 62 per cent of global fund managers currently overweight equities, according to a Bank of America survey.

Nearly two-thirds expect the global economy to continue its rise over the year ahead, although just 7 per cent said the stock market was in “bubble” territory.

Nevertheless, 66 per cent said current conditions reflect the late stages of a bull market, with some arguing it has had only brief interruptions since the end of the global financial crisis.

Risks ahead include rising bond yields and inflation, along with the prospect of higher US taxes.

Warnes advises investors to consider the risks around overheated equity markets.

“I know the tide is running, but you’ve got to be cautious and I’d think about adding some more cash to the sideboard – you can always come back into the market. As I’ve written in my latest overview for Morningstar, the loose monetary policy of the RBA suggests uncertainty, not confidence.”

Property outlook uncertain

For the property market, expectations are mixed.

Economists are tipping more price increases ahead on the back of continued low interest rates, with the Reserve Bank of Australia (RBA) flagging it will keep its current record-low official rate steady through to 2024.

Goldman Sachs expects price gains of around 20 per cent over the next two years, while ANZ has projected a 17 per cent rise in 2021 and UBS has tipped 15 per cent.

Barring a shock rate hike by the RBA, analysts see ‘macro-prudential measures’ as the main threat to the bullish outlook. Tax changes could also be a risk.

In New Zealand, the government recently clamped down on negative gearing to curtail investor activity following a 20 per cent jump in house prices. The tightening could see house price growth fall by up to 20 per cent, according to Goldman Sachs.

While similar measures are considered unlikely in Australia, Goldman Sachs expects policymakers here to watch Wellington’s moves closely.

Yet both the Australian Prudential Regulatory Authority (APRA) and the RBA appear reluctant to intervene, with APRA chairman Wayne Byres saying it was not the regulator’s job to “solve house prices” or “solve affordability.”

Property

CoreLogic's executive of research Tim Lawless told The Australian that interest rates have a role to play in the price spikes, but at the heart it’s a story about the disconnect between supply and demand.

“It really reflects an absolute surge in transactional activity and active buyers," he said.

"There’s not a lot of stock around for people to purchase, and there’s a lot of people looking to buy. The urgency that situation is creating has put a lot of upward pressure on prices.”

Lawless believes the strong growth cycle is "unlikely to last", predicting another round of macro-prudential measures. "I think it’s probably becoming a matter of when not if," he said.

With banks already moving away from discounted longer-term fixed loans, Morningstar's Warnes suggests property buyers “lock in low rates as long as you can".

is a Morningstar contributor.

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