Market Watch

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.00 per cent. This follows a similar reduction at the Board’s June meeting. This easing of monetary policy will support employment growth and provide greater confidence that inflation will be consistent with the medium-term target.

The outlook for the global economy remains reasonable. However, the uncertainty generated by the trade and technology disputes is affecting investment and means that the risks to the global economy are tilted to the downside. In most advanced economies, inflation remains subdued, unemployment rates are low and wages growth has picked up. The slowdown in global trade has contributed to slower growth in Asia. In China, the authorities have taken steps to support the economy, while continuing to address risks in the financial system.

Global financial conditions remain accommodative. The persistent downside risks to the global economy combined with subdued inflation have led to expectations of easing of monetary policy by the major central banks. Long-term government bond yields have declined further and are at record lows in a number of countries, including Australia. Bank funding costs in Australia have also declined, with money-market spreads having fully reversed the increases that took place last year. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the low end of its narrow range of recent times.

Over the year to the March quarter, the Australian economy grew at a below-trend 1.8 per cent. Consumption growth has been subdued, weighed down by a protracted period of low income growth and declining housing prices. Increased investment in infrastructure is providing an offset and a pick-up in activity in the resources sector is expected, partly in response to an increase in the prices of Australia’s exports. The central scenario for the Australian economy remains reasonable, with growth around trend expected. The main domestic uncertainty continues to be the outlook for consumption, although a pick-up in growth in household disposable income is expected to support spending.

Employment growth has continued to be strong. Labour force participation is at a record level, the vacancy rate remains high and there are reports of skills shortages in some areas. There has, however, been little inroad into the spare capacity in the labour market recently, with the unemployment rate having risen slightly to 5.2 per cent. The strong employment growth over the past year or so has led to a pick-up in wages growth in the private sector, although overall wages growth remains low. A further gradual lift in wages growth is still expected and this would be a welcome development. Taken together, these labour market outcomes suggest that the Australian economy can sustain lower rates of unemployment and underemployment.

Inflation pressures remain subdued across much of the economy. Inflation is still, however, anticipated to pick up, and will be boosted in the June quarter by increases in petrol prices. The central scenario remains for underlying inflation to be around 2 per cent in 2020 and a little higher after that.

Conditions in most housing markets remain soft, although there are some tentative signs that prices are now stabilising in Sydney and Melbourne. Growth in housing credit has also stabilised recently. Demand for credit by investors continues to be 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.

Today’s decision to lower the cash rate will help make further inroads into the spare capacity in the economy. It will assist with faster progress in reducing unemployment and achieve more assured progress towards the inflation target. The Board will continue to monitor developments in the labour market closely and adjust monetary policy if needed to support sustainable growth in the economy and the achievement of the inflation target over time.

Source: Reserve Bank of Australia, July 2nd, 2019

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Australia’s love of home ownership can lead real estate investors to overlook the potential benefits of global listed real estate and owning a share of some of the best real estate assets in the world.

Most investors understand the benefits of listed real estate. It has higher liquidity and lower transaction costs than direct property.

But there are three lesser known benefits of listed real estate that may make it suitable for investors seeking income.

1. Attractive risk-adjusted returns

The first is attractive risk-adjusted returns. Given close to 60% of the asset class is in North America, therefore using US data as a proxy, for investors in that jurisdiction willing to hold listed real estate for five years or more¹ , listed real estate has the potential to generate similar returns, and the same diversification benefits to a portfolio over time, as physically owning the actual buildings. However we’d note that there may be more shorter term volatility as shown in Figure 1, but that is to be expected as you can find daily liquidity for an illiquid asset class.

Many investors equate listed real estate with equities and view it as a short-term investment. But the asset class hits its stride when held over time. Real estate, both listed and direct, is a long-term investment by the very nature of the leasing contracts and the longevity of the physical assets.

The correlation of returns between listed and unlisted increases significantly as the investment horizon lengthens. Indeed, the correlation between the two is 0.9 of listed share prices and the underlying real estate valuations of the assets they own on a rolling three year basis (figure 1 is the US)², if you remove leveraging differences from both asset classes and control them for the industry practice of appraisal smoothing.

Figure 1 – Rolling Three Year Annualised Total Return: Listed Shares & Underlying Real Estate Assets – USA

Source: Green Street Advisors – December 2018

2. Direct property beacon

We believe that listed real estate trusts (REITS) can also be used by investors to determine what the direct market is likely to do. Again using the US as a proxy, when analysing US data of whether REITs are trading at a premium or discount to net asset value (NAV) – the value of the trust’s holdings at a given time — has historically been an indicator in that jurisdiction of how the direct market will move in the coming 12 -18 months, although future performance can never be guaranteed.

Put very simply, if a REIT trades at a premium to its NAV, the market believes its assets will appreciate above levels indicated by market pricing of the underlying direct real estate. The inverse occurs when trading at discounts.

When REITs in the US have traded at NAV discounts greater than 10 per cent, historically they have subsequently outperformed the unlisted market by more than 1200 bps per annum over the next three years. Observed NAV premium/discounts in the public market provide a strong signal as to the appropriate mix of listed vs unlisted real estate, and there have been times in the past when investors with no listed exposure have experienced suboptimal performance.

Figure 2 – Listed Premiums/Discount and unlisted returns

Source: Green Street Advisors – March 2018

Figure 3 – Listed Returns minus unlisted returns, next 3 years (Ann.) 

Source: Green Street Advisors – March 2018

3. Global Appeal

The third characteristic is the growing global appeal of listed real estate.

Listed real estate was once the poster child of leverage, particularly in Australia during the financial crisis. But that was now a decade ago and many lessons have been learned and now listed real estate has resumed the role for which it was intended: a proxy for direct real estate at a point in time when allocations to real estate as an asset class are rising.

Globally, in many markets, listed real estate is trading at a discount to NAV. The biggest discounts are in Japan developers, retail and the UK and New York office markets. Australian REITs, with the exception of retail malls, are trading at a premium, with larger premiums ascribed to fund managers, industrial and datacentre landlords.

In individual markets where listed real estate is trading at a discount to NAV, the best management teams have been taking advantage of strong pricing in direct real estate markets, selling core assets and using the proceeds to either pay down debt or return capital to investors.

Listed real estate can be a complement to unlisted property or a useful proxy for unlisted property. This is particularly the case for investors who want to establish an allocation to real estate but are struggling amid global competition for quality assets and don’t want the headache or complexity of managing direct property assets. The AMP Capital Core Property Fund has allocations to both listed and unlisted real estate.

Greater diversification

On top of these benefits, global listed real estate typically has deep and unrivalled access to a greater diversity of institutional quality real estate sectors than the unlisted market. These sectors may include (but are not limited to) last mile logistics, datacentres, healthcare, aged care and manufactured housing.

These different sectors perform under varying economic conditions and their relevance and portfolio sizing should be assessed on what role they play in the underlying economy of the future. Given many of them are intertwined with long-term secular economic trends, having exposure to these assets is more logical to us than owning a retail dominated fund or a residential apartment investment.

Risks of investing in listed real estate

As with all investments there are associated risks to be aware of. Risks specific to real estate investments include the risks of investing in share markets, property and international markets, as well as the risks associated with interest rates, gearing and the cost of debt, derivatives, investment management, co-ownership of assets, fluctuations in rental income, rental demand and fund termination risks. For more information of the risks of investing in these types of assets, investors should consult the offer documents for the fund.

¹Source: Green Street Advisors (Feb 2016)
²Source: Green Street Advisors (Dec 2018)

Investors should consider the Product Disclosure Statement (PDS) available from AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) for the AMP Capital Core Property Fund (Fund)) before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it’s important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. The Trust Company (RE Services) Limited (ABN 45 003 278 831, AFSL 235150) (The Trust Company), a wholly owned subsidiary of The Trust Company Limited (ABN 59 004 027 749), is the responsible entity of the Fund and the issuer of units in the Fund. The Trust Company has not prepared this information and makes no representation or warranty as to the accuracy or completeness of any statement in it. Neither The Trust Company nor any company in the AMP Group (which includes AMP Capital and AMPCFM) 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 information 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 the investor’s 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.

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

Source: AMP Capital 11 July 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 have profited from strong returns, backed by central bank liquidity and falling interest rates. But with rates seemingly at rock-bottom levels and global economic recovery maturing, returns could fall and markets could become more volatile. Investors may benefit from looking to use Dynamic Asset Allocation (DAA) to profit from shorter market cycles if they are to keep generating wealth.

Investors have enjoyed strong returns from markets in recent years, fuelled by Central Bank quantitative easing and record-low interest rates. Things have been so good and returns so smooth that many investors may have forgotten that financial markets are cyclical.

However, because we are now entering late cycle and rates are already so low, any change in interest rate direction could potentially challenge valuations and trigger greater market volatility.

If investors are to seize opportunities and generate wealth in this new environment, they will need to be flexible and adjust their portfolio to the market’s ebbs and flows.

We believe investors should increasingly turn to Dynamic Asset Allocation (DAA), a strategy that allows investors to regularly adjust their allocations to markets and asset classes based on what the market is doing and what they believe it is likely to do.

But how do investors implement DAA?

The principles of DAA

To successfully use DAA, investors must first understand the principles that underpin it. At AMP Capital we have engraved four key principles into our DAA investment process that will help any investor considering implementing such a strategy:

1. Risk is not the same as volatility

The first principle is that ‘volatility’ is not ‘risk’. Volatility is backward looking and measures an asset’s variability (how much its price moves around). Risk, however, is the potential to lose money and not recover. Investors using DAA should focus more on price ‘risk’ than on backward looking analysis like volatility.

2. Factor in investor expectations

Investors must also understand the critical role of investor expectations. High-performing companies with low volatility can have more downside risk than low-performing companies with high volatility. High-performance companies can find it increasingly hard to meet investors’ big expectations. When they disappoint, their shares fall. But low-performing companies’ expectations are typically lower and easier to beat. If they beat low expectations, their shares are can be strongly re-rated.

3. Diversification based on historical correlation is destructive

The third principle is that investors shouldn’t rely on historical correlations. Correlations can change, and they typically increase during economic instability. We often see high-priced popular investments become overcrowded. But when the economy turns, investors all decide to sell at the same time. Investors should consider diversifying based on asset valuations and how crowded a position is, rather than using historical correlations.

4. The market cycle leads the economic cycle

The final principle is that history has shown us that weak economic conditions don’t always lead to weak future share market returns. If you aim to buy assets when the economic cycle is strong and sell them when it’s weak, you may inevitably miss out on opportunities and be exposed to risks. It would, however, also be unreasonable to assume that the macroeconomics and earnings have an insignificant impact on future market returns. Indeed, a sustained and durable move higher in shares requires strong support from earnings growth and a healthy macro backdrop.

Cycles

DAA recognises that markets are driven by cycles. Those cycles range from multi-year ‘secular’ cycles to multi-month periods called ‘cyclical’ cycles. The secular cycle drives the primary trend in the share market; but the shorter cyclical cycles can also impact on investors’ financial goals. Secular cycles are driven by valuations; cyclical moves are driven by investor sentiment and central bank actions.

In the new market environment investors are facing now, it’s safe to assume the secular market cycle will deliver low returns. Shorter-term business cycles will therefore become critical, and to keep generating returns, investors should consider using DAA in attempting to lock in profits during upswings and protect returns during downswings.

Author: Nader Naeimi – Head of Dynamic Markets and Portfolio Manager of Dynamic Markets Fund Sydney, Australia

Source: AMP Capital 26 June 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.

A year ago, we published a paper on the challenges of transitioning to autonomous vehicles. It focused not just on the technology required, but also on the infrastructure challenges it presented – such as the need for large investments and tough socio-political choices – in order to facilitate widespread adoption.

We have come across a number of interesting anecdotes of late, which highlight the continued infrastructure challenges related to this mega-trend.

1. Transurban recently released videos from the various autonomous vehicle trials it conducted, which demonstrate that camera technology is still prone to basic errors, including line-following issues and being confused by scuff marks on roads. In general, the road furniture (signs, markings) in Australia is better than elsewhere in the world, but there is still much room for improvement. The results can be seen here.

2. A persistent issue among politicians is how to bridge the revenue shortfall from gasoline that will inevitably occur with widespread adoption of electric vehicles.

In Europe, for example, fuel taxes currently comprise, in aggregate, 3.2 per cent¹ of total tax income for governments (and as high as 7 per cent in some countries), so there is a sizeable amount of tax revenue at risk from electric vehicle adoption. In Illinois, there’s been furore around proposals that electric vehicle owners (who benefit from extensive subsidies), should pay for the shortfall in gas tax revenue, at a higher level than existing gasoline cars are asked to pay.

This tax conundrum has raised its head at several forums we have attended on autonomous vehicles. We’ll be sure to provide an update when we hear a workable solution.

3. Bank of America Merrill Lynch analysts recently halved their estimate of the penetration of electric vehicles in 2030 from 30 per cent to 15 per cent²  of vehicle sales. This is largely due to an expectation that cost parity between electric and gasoline vehicles will take longer than initially thought. China has also recently announced it is to cut subsidies available to electric vehicle purchasers by around 50 per cent, which could put further pressure on the rate of adoption in a market which is moving faster than most.

Are there other impacts?

For toll road operators, the likely impact of autonomous vehicles may be quite varied, depending on the type of road and the length of concession. For inter-urban roads, autonomous vehicles could increase demand, while intra-urban roads could see reduced demand from multiple vehicle occupancy and lower congestion.

In either case, we believe this is only likely to have a meaningful impact on the present value of cash flows in the concession from the mid-2030s onwards. During this timeframe all major listed European concessions will have already expired and have been retendered (allowing owners to price-in this risk).

For newer concessions, such as Westconnex, the long remaining life of the asset means that Transurban managers have needed to ‘take a view’ on the likely impacts at the time of the bid – not an enviable task.

However, we believe the largest issue in getting autonomous vehicles on the road will be the social impact. It will inevitably favour urban citizens over rural and those with high disposable incomes versus low, which are exactly the types of trends society is pushing back against today.

If governments decide to tax their way to paying for the required infrastructure rather than following a fully-allocated ‘user pays’ model (on which we believe the unit cost economics barely reach what public transport can already be delivered for today), autonomous vehicles could simply be a tool to further push on social pressure points.

¹Taxation Trends in Europe 2019: DG Taxation and Customs Union
²Can’t buy EV’s love (yet) … in the US. Bank of America Merrill Lynch. 31st May 2019

Content sourced from Cuffelinks and Livewire does not represent the views of AMP Capital or any member of the AMP Group. All information on this website is subject to change without notice.

Author: Andy Jones – MBA, MEng and MA (Cantab.), Portfolio Manager/Analyst, London, United Kingdom

Source: AMP Capital 9 July 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.

https://vimeo.com/345828633

Investors worried about the US/China trade war have another geopolitical concern with tensions rising between President Trump and Iran.

It does seem President Trump and the US has a predilection for getting into conflicts or issues around the world.

Investors are right to worry about the situation in the Middle East. It could be a source of volatility in the short term at a time when global markets are already vulnerable. But ultimately, like the trade war, we believe that the US will seek to negotiate a solution.

Unwinding a deal

Back in 2015 various countries around the world signed a deal with Iran to limit Iran’s nuclear capabilities in return for Iran being able to export its oil. In other words, sanctions were removed from Iran.

That helped push oil prices down and petrol prices at the bowser in Australia down.

But last year, President Trump said America was going to leave the 2015 deal because he believes Iran is building a nuclear program. American sanctions kicked in against anyone who trades oil with Iran.

That of course has led to a sharp reduction in Iranian oil exports and some rise in world oil prices.

War fears

Of course, Iran isn’t very happy about this. That has created tension in the Middle East and prompted fears of a military confrontation. After initially approving a military strike after Iran downed a US drone, President Trump pulled back from launching the strike.

Trump has also announced more sanctions and in response Iran has closed diplomatic channels.

The tension obviously threatens the flow of oil through the Strait of Hormuz through which 20% of the world’s oil production flows daily.

Trump’s interests

This is a major flash point and major issue.

Ultimately, however, I do think it’s again in President Trump’s interest to resolve this issue through negotiation rather than military action.

Americans do support America being tough particularly when it comes to the Middle East. But when it gets bogged down and it results in much higher oil prices, as presidents found in the 1970s, it doesn’t go down so well with the American electorate.

Support from many traditional US allies like Europe is also weak because they didn’t support Trump’s decision to break off from the 2015 nuclear deal with Iran.

Source of volatility

So, we believe it is in Trump’s interests to resolve this issue in a negotiated fashion that avoids a sharp rise in oil prices.

But obviously the tension is a source of uncertainty, along with trade. And both of those issues – the trade war and Middle East tension – are potential sources of volatility for investment markets over the next few months.

Author: Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

Source: AMP Capital 11 July 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.

The proliferation of online shopping has heralded a structural shift in the marketplace. With it comes challenges for investors, particularly passive investors whose portfolio returns depend, in part, on history repeating itself.

This new environment raises a number of questions for investors including:

• What are the prospects for other property options, particularly industrial real estate?

• How should investors think about property investing as this structural shift occurs?

• What are the consequences for remaining a passive investor and the billions of dollars allocated that way?

• How much of an investor’s portfolio should be in retail property? Should it be the 48 per cent that it is today when passively invested? (62 per cent when leverage is removed)

• What role does active investing have?

 If you would like to discuss any of the issues raised in this white paper, please call on |PHONE| or email |STAFFEMAIL|

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

Source: AMP Capital 17 June 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.