Category: Rss-feed-market

There are mechanisms to maximise returns in this lower-for-longer environment, and a green alpha strategy in real estate investment is one option on the table.

Against a global backdrop of lower interest rates, falling government bond yields and bank term deposit returns at or below 2 per cent, achieving higher, low risk returns is becoming more challenging for investors.

With the lower for longer trend seemingly entrenched as global economic uncertainty rises, investors are turning to green alpha strategies as one way to maximise returns, whilst improving the sustainability performance of Australia’s built environment at the same time.

How does this apply to real estate?

From a real estate perspective, maximising the returns you can generate in a portfolio is primarily linked to boosting the rental income and keeping operational costs down. Reducing the outgoings of an asset by cutting energy costs is an important, and relatively simple method to boost income yields and according to market evidence and international studies into green buildings, can make significant differences to the return an asset delivers over its life.

Asset valuations and returns are already starting to reflect a growing divergence between high-standard green buildings and their less green peers that can add as much as 50bps per annum to a total return.

For example, according to the MSCI Green Property Investment Digest, over the past three years, Prime CBD Office buildings with a NABERS star rating higher than four stars (the maximum is six) have delivered a total return to their investors of 13.4%, versus 12.9% for all other assets in this category.

Source: NABERS.gov.au

Looking at a cities level, investors chasing green returns might do well to focus on the Melbourne market, which had the highest total returns for prime office buildings with a 4-6 star NABERS rating at 15% in the year to June 2019.

After Melbourne, investors in Canberra benefitted from the highest ‘green alpha’ with a 200 basis point boost in total returns, versus the average for the prime office market there. Government tenants in this market place a high priority on green credentials when leasing space, driving better income return outcomes for landlords who can offer 5 star plus opportunities in that market.

Source: MSCI/IPD, AMPCI RE Research

Thinking long term, and looking beyond cost savings, sustainability initiatives such as integrated solar in commercial assets can provide long term downside protection against spikes in electricity costs. These sort of initiatives could reduce the outgoings of an asset, a competitive advantage at a time where electricity prices have risen by over 20% in the past two years.¹

Green alpha and the boost it provides to total returns has become a bigger part of an asset manager’s toolkit in maximising returns. Greener buildings, apart from delivering superior returns, tend to offer investors lower systemic risk with a more stable income profile, lower incentives and enhanced tenant “stickiness” which can reduce the vacancy of a portfolio.

The bottom line is, environmentally sustainable buildings offer both financial and environmental benefits to investors for the long term. In an increasingly challenging lower for longer returns environment, green alpha is a pathway to get ahead of the pack.

¹ https://www.nabers.gov.au/publications/annual-report

Author: Luke Dixon, Head of Real Estate Research – Real Estate Sydney, Australia

Source: AMP Capital 28th Oct 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

Investors may be surprised to learn about the patterns which have formed in the small caps market since the Global Financial Crisis. Here, we take a closer look at recent data, and what is driving earnings and valuations.

Overview

Australian small cap stocks have failed to live up to their potential in recent times. By definition, small cap companies are generally at an earlier stage of their life cycle with good growth opportunities ahead, and in an environment of record low interest rates and freely available money for companies to expand their operations, it would be expected that they are growing strongly and generating good returns. Some are doing just that, however it may surprise investors that the aggregate level of earnings generated by companies in the ASX Small Ordinaries Index has consistently declined since 2008 when the Global Financial Crisis (GFC) hit.

Source: AMP Capital, FactSet (2001-2019)

Earnings under pressure

There have been a few different factors driving the underperformance of earnings:

• The end of the resources capex boom in 2012-13 resulted in large earnings downgrades in mining and mining services related stocks, which were significant components of the index at the time.

• The domestic environment has been challenging for large parts of the economy with cyclical and structural factors affecting the earnings base of both consumer (subdued consumer confidence, e-commerce) and housing (new start declines, rising power prices) related companies.

• A number of technology and other high growth stocks have gone through a significant cost investment program – investing heavily in sales, marketing, product development and offshore growth to capitalise on new market opportunities. This has the potential to raise the earnings profile in outer years but has resulted in downgraded earnings forecasts in the near term.

The overall market has delivered muted growth since 2014, which has reflected a stronger period of earnings growth in mining companies (notably gold stocks), while earnings for industrial companies have flat lined and are virtually unchanged since post-GFC lows 10 years ago.

Small caps versus large caps

The factors highlighted above go a long way to explaining the underperformance of small caps stocks compared to their large cap counterparts over this time period. In fact, since small cap earnings bottomed after the GFC in September 2009, the Small Ordinaries Accumulation Index has underperformed the ASX 200 Accumulation Index by 70% in aggregate. It’s interesting that an index dominated by banks and diversified miners has substantially outperformed an index which has contained material exposure to stocks which have captured investor’s attention over the past few years including technology, Chinese consumer consumption (e.g. infant formula and vitamins), electric vehicles and gold.

Source: AMP Capital, FactSet (2009-2019)

Follow the earnings

The research we have undertaken into small cap returns and our experience in the market shows that earnings drive share prices. Valuation is an important consideration, however it is mean reverting and hard to predict, so we focus on our core strength – forecasting earnings. An earnings-based approach to valuing a stock is resilient to valuation changes and its serially correlated nature makes it more predictable.

Since 2001, the ability to pick a portfolio of stocks that has actually delivered the highest level of earnings growth in the small caps market would have delivered a compound 14% annual return, or a cumulative return of 828% over this period. This compares to an index return of 1% per annum. Obviously forecasting earnings with perfect foresight is impossible, but this illustrates the potential opportunity for active managers in the space who can spend time undertaking detailed fundamental research on a company and get an edge on the market.

Source: AMP Capital, FactSet

The above chart also shows that sell side analysts have added very little value when picking earnings over this period and investing by following consensus earnings leads to underperformance. In fact, since 2001 a portfolio of small cap stocks with the highest growth forecast by consensus has provided a return of -2% per annum, or -29% in aggregate. This isn’t a huge surprise given sell-side analyst forecasts are typically a lagging indicator. This is further exacerbated by the number and quality of earnings estimates in the Australian small cap market falling dramatically over the past few years. 

Source: Goldman Sachs Global Investment Research, Factset

When analysing performance of the AMP Capital Australian Emerging Companies Fund since its inception in July 2014 to September 2019, the Small Ordinaries Index has been a solid performer despite the earnings headwinds, providing investors with a 8.9% per annum compound return (55.9% cumulative return). But when we dig into what has been driving this return, it’s clear this performance has been by dividends with muted earnings growth and a P/E multiple re-rate (or put simply, the stocks becoming more expensive). In a world of record low interest rates and rising asset values, the multiple re-rate is understandable and not out of sync with other asset classes, however it is unlikely to be sustainable unless investors start to see material earnings growth starting to come through in order to justify the higher valuations.

The AMP Capital Australian Emerging Companies Fund has returned 11.5% per annum (after-fees) over the same period (76.8% cumulative return), with earnings growth contributing the majority of returns, which is aligned to our investment philosophy and process. The ability to pick stocks which are growing earnings consistently has been the major driver of the Fund’s outperformance.

Past performance is not a reliable indicator of future performance Cumulative total returns from July 2014 to September 2019 are shown after fees and before tax

Bigger is better? Not necessarily…

Despite the relatively gloomy picture we have presented for small cap earnings, there is one major reason for optimism in small caps. The median small cap manager has significantly outperformed not only the ASX Small Ordinaries Index, but also the ASX 200 Index and the median large cap manager over a long time period. Investors who have trusted their money with even a middle of the pack small cap manager have seen excellent compound returns over this period. The Australian small caps market is inefficient and not well researched, providing good managers with the opportunity to find new information which gives them an edge in picking stocks.

Source: AMP Capital, Mercer, FactSet (2000-2019)

Key take-aways:

• An investment process which is focused on earnings can lead to significant outperformance.

• The need for investors to be benchmark unaware – why invest in a stock just because it is in an index? It’s much better to construct a high-quality portfolio of stocks from all the available options in the investable universe.

• The benefit of active management, especially in small caps, which have proven to generate excellent returns for investors over the long term.

Author: Matt Griffin, Co-portfolio Manager, Small Caps Sydney, Australia

Source: AMP Capital 8th Nov 2019

Important notes: AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMPCFM) is the responsible entity of the AMP Capital Australian Emerging Companies Fund (Fund) and the issuer of the units in the Fund. To invest in the Fund, investors will need to obtain the current Product Disclosure Statement (PDS) from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232 497) (AMP Capital). The PDS contains important information about investing in the Fund and it is important that investors read the PDS before making a decision about whether to acquire, or continue to hold or dispose of units in the Fund. Neither AMP Capital, AMPCFM nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this document, AMP Capital makes no representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to their objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

At its meeting today, the Board decided to leave the cash rate unchanged at 0.75 per cent.

While the outlook for the global economy remains reasonable, the risks are tilted to the downside. The US–China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty. At the same time, in most advanced economies, unemployment rates are low and wages growth has picked up, although inflation remains low. In China, the authorities have taken steps to support the economy while continuing to address risks in the financial system.

Interest rates are very low around the world and a number of central banks have eased monetary policy in response to the persistent downside risks and subdued inflation. Expectations of further monetary easing have generally been scaled back over the past month and financial market sentiment has improved a little. Even so, long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are also at historically low levels. The Australian dollar is at the lower end of its range over recent times.

The outlook for the Australian economy is little changed from three months ago. After a soft patch in the second half of last year, a gentle turning point appears to have been reached. The central scenario is for the Australian economy to grow by around 2¼ per cent this year and then for growth gradually to pick up to around 3 per cent in 2021. The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth. The main domestic uncertainty continues to be the outlook for consumption, with the sustained period of only modest increases in household disposable income continuing to weigh on consumer spending. Other sources of uncertainty include the effects of the drought and the evolution of the housing construction cycle.

Employment has continued to grow strongly and has been matched by strong growth in labour supply, with labour force participation at a record high. The unemployment rate has remained steady at around 5¼ per cent over recent months. It is expected to remain around this level for some time, before gradually declining to a little below 5 per cent in 2021. Wages growth remains subdued and is expected to remain at around its current rate for some time yet. A further gradual lift in wages growth would be a welcome development and is needed for inflation to be sustainably within the 2–3 per cent target range. Taken together, recent outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

The recent inflation data were broadly as expected, with headline inflation at 1.7 per cent over the year to the September quarter. The central scenario remains for inflation to pick up, but to do so only gradually. In both headline and underlying terms, inflation is expected to be close to 2 per cent in 2020 and 2021.

There are further signs of a turnaround in established housing markets, especially in Sydney and Melbourne. In contrast, new dwelling activity is still declining and growth in housing credit remains low. Demand for credit by investors is subdued and credit conditions, especially for small and medium-sized businesses, remain tight. Mortgage rates are at record lows and there is strong competition for borrowers of high credit quality.

The easing of monetary policy since June is supporting employment and income growth in Australia and a return of inflation to the medium-term target range. Given global developments and the evidence of the spare capacity in the Australian economy, it is reasonable to expect that an extended period of low interest rates will be required in Australia to reach full employment and achieve the inflation target. The Board will continue to monitor developments, including in the labour market, and is prepared to ease monetary policy further if needed to support sustainable growth in the economy, full employment and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, November 5th, 2019

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

Right now, the developed world is on the cusp of a fourth industrial revolution, and it is set to have a more transformative impact on everyday life than the three revolutions before it.

The fourth industrial revolution is about embedding the cyber world into everyday lives and workplaces. The roll-out of 5G is core to this revolution, enabling technologies which can power and transform energy management, transport networks, healthcare and entertainment.

A fundamental change in how we live, work and transact will have a knock-on impact to how industrial real estate is used and valued. This disruption presents both opportunities and challenges for investors – industrial real estate will see some big wins as 5G is rolled out, but not every asset will have the potential for gains.

Author: James Maydew, BSc (Hons), MRICS, Head of Global Listed Real Estate, Sydney, Australia

Source: AMP Capital 20 Sept 2019

Important notes: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.