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Australian Investment Blog

Morning Report 13/12/2017

Should investors follow Sir Frank Lowy out of Property? (SCG, CHC, VCX, WFD)

The ASX200 has finally managed to close above the psychological 6000-area, following a relatively lacklustre day apart for the Real Estate Sector which rallied almost 2% resulting from the news of Paris-based, Unibail-Rodamco SE takeover offer of Westfield (WFD) for A$21 billion i.e. $10.10 a share, or ~18% above the last close.

Overnight we have seen US stocks rally to fresh all-time highs, led by the financials who gained well over 1%, with only the interest rate sensitive utility stocks noticeably struggling. This morning, the local market is set to open within ~0.5% of the 2017 high, which we still believe will be broken in the coming 2-weeks.

Overall there is no change to the view of MM with a 6125 target area to say goodbye to 2017, around 2% above yesterday’s close and a +8.1% return for the year not including dividends.

Today not surprisingly, we are going to focus on the Real Estate sector following the major takeover news of WFD.

ASX200 Daily Chart

The Real Estate Sector

The Sir Frank Lowy story is an incredible one, which should give any business hopefuls faith in what can be achieved through hard work and perseverance. The epic story / journey started over 50-years ago in Western Sydney and finished this week with the $21bn takeover of WFD.

This amazing holocaust survivor has decided to check out of managing shopping centres and focus on investing the family ~$5bn fortune. The questions we have to ask are:

· Why has an expert in the shopping centre business decided to become an investor as opposed to a manager?

· Does the Lowy family believe retail shopping centres are too hard following the advent of on-line retailing?

Unfortunately we held no position in WFD yesterday, although the technicals were positive in Weekend Chart Pack – see below.

This feels like one of those rare deals that fits well for both parties. The Lowy’s are selling 37.5% above the year’s low and the French buyers are getting set 10% below the last 2-years high.

I cannot help but feel that Sir Frank Lowy is selling the top in property – at least from a risk / reward perspective.

Westfield Corp (WFD) Monthly Chart

Today we are going to look at 3 stocks In the Real Estate Sector which is up +12.6% for the year, an impressive performance considering that interest rates / bond yields are increasing globally.

When we stand back and look at both the REIT and Real Estate Indices, we are bullish technically looking for another ~10% upside. Although when heavyweight WFD recommences trading up ~18%, it should make a dent in this objective.

Australian Real Estate Investment Trusts (REIT) Index Monthly Chart

ASX200 Real Estate Index Monthly Chart

1 Scentre Group (SCG) $4.35

The developer and operator of shopping centres through Australia and New Zealand was the main beneficiary of the WFD news yesterday, rallying 4.1%. SCG currently pays a grossed up dividend of ~5.2%.

We are neutral at present, but would be selling ~$4.70 if we were long.

Scentre Group (SCG) Weekly Chart

2 Charter Hall (CHC) $6.39

CHC has been the strongest real estate stock this year, gaining 38% while the ASX200 has only rallied 8.4%. CHC manages real estate investment funds plus developing commercial, residential and industrial properties. The stock is currently yielding 5.3% grossed up.

We see no good risk / reward buying opportunity, but at this stage would stay long with stops under $5.90.

Charter Hall Group (CHC) Weekly Chart

3 Vicinity Centres (VCX) $2.87

Before the takeover bid, WFD was the worst performing stock in the Real Estate Sector being down 5% over the last 12-months, the next worse performer has been VCX which is down -2.7% - MM is long in our Income Portfolio from $2.74, a position that is showing an almost 5% paper profit. VCX operates shopping centres across Australia and is currently paying a 6.03% gross yield, while trading an estimated valuation of 15.9x 2018 earnings.

We still like VCX in the sector, believing it to be cheap. A break back under $2.78 is required on the downside to concern us.

Vicinity Centres (VCX) Weekly Chart

Global markets

US Stocks

No change, we still need a ~5% correction to provide a decent risk / reward buying opportunity, no sell signals have been generated to-date, but it’s struggling slightly above 2650.

The feeling is traders are going short and then getting caught as the market fails to correct.

The current strong rally since Donald Trump’s election adds to our confidence with buying a decent ~5% pullback.

US S&P500 Weekly Chart

European Stocks

European stocks look to be failing after their recent break out to fresh 2017 highs, we remain neutral / negative Europe over the next few weeks.

German DAX Weekly Chart

Conclusion (s)

We are short-term bullish the real estate sector, targeting gains for both main indices of ~10%. However from a risk / reward perspective, we see no buying opportunity and would be following Sir Frank Lowy selling any decent strength in the sector.

Overnight Market Matters Wrap

· The broader US equity markets rallied overnight, however the tech heavy Nasdaq 100 underperformed with US investors now factoring 2 rate hikes in 2018.

· Iron Ore rallied 3.5% higher, but it seems our local names have anticipated this yesterday, with BHP in the US ending its session just marginally higher from Australia’s previous close.

· US shopping mall stocks rallied after the US$15.8b bid for Westfield (WFD) from Unibail-Rodamco.

· The December SPI Futures is indicating the ASX 200 to open with little change this morning, towards the 6015 area.

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate. Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy. Prices as at 13/12/2017. 8.00AM.

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