From The Australian:
Fear of a domestic housing downturn is overblown and the current PE discount of housing-exposed companies relative to the broader share market is unwarranted, according to Deutsche Bank.
While recent falls in auction clearance rates presage a slowing in house price growth, history suggests that need not dampen housing construction.
Moreover, several years of flattish house prices are more likely than price falls after a boom in Australia, Deutsche Bank equity strategist Tim Baker says.
He also sees scope for housing momentum to spread to other states, particularly Queensland, allowing nationwide strength to continue even as NSW cools.
And while housing starts are at record highs, they are below previous peaks relative to population, which is also at a record high, Mr Baker says.
Recent underperformance of housing-exposed stocks leaves them with a 5%-10% PE discount to the market – the largest in four years – despite above-market EPS growth prospects, according to Mr Baker.
His model portfolio contains Boral, Stockland, Fletcher Building, Harvey Norman and REA.
Mr Baker has been singing this tune for two years and it’s even more dangerous now than it was in April 2014:
1. EPS forecasts holding up nicely, and valuations look reasonable for cyclicals
2. Businesses are reporting the best conditions in 2½ years
3. The turn in the labour market should boost household income & spending
4. Chinese growth should get a boost from exports
Hasn’t worked out that way has it? And it isn’t about to. Australian property doesn’t need to crash to screw housing cyclical earnings, it’s only got to stall and the residential construction boom will roll over. The peak is already obvious in leading indicators. Baker’s long list should be everyone’s prime shorts.
Baker has been too bullish for two years, selling a thesis that US-style cost cutting and productivity gains would boost profits. Sadly, however, there are no productivity gains and national income is under external assault from commodity price collapses as well, which puts pressure on most domestically focused business.
The eastern property bubble has offset this somewhat but buying it now, so late in the cycle as regulators and banks tighten, is unadulterated risk for anyone looking for anything other than a short term trade on a rate cut.
