Rudi's View | Sep 19 2019
Dear time-poor investor: an assessment whether the bond market induced momentum switch for equities spells more trouble ahead?
In this week's Weekly Insights:
-Bonds Add To Uncertainty
-Dividend Cuts, They Are Coming
-Rudi On Tour
Bonds Add To Uncertainty
By Rudi Filapek-Vandyck, Editor FNArena
Investors should draw an imaginary elastic band between share prices of, say, Goodman Group ((GMG)) and Scentre Group ((SCG)) as that will help them in understanding current dynamics in the local share market.
We've all heard and read it before: the share market is heavily bifurcated; general indices no longer tell the full story about what is going on in equities. What we are not often told about is that the gap between the Winners and Losers in the share market, between those shares that are fully participating in this year's bull market and those that are not, the laggards, that gap at times stretches out too far.
Hence why I think the comparison with an imaginary elastic band is but apposite. Whenever the gap stretches out too wide, next follows a snap back that closes the gap, somewhat, and up until this month only temporarily.
I picked Goodman Group versus Scentre Group because, to be honest, those were the two opposites that first came to mind. As the chart below shows, since January the share price of the laggard (Scentre Group, in orange) has weakened slightly while Goodman Group shares (blue line) torpedoed onwards and upwards to a gain, excluding dividends, of no less than 90% by the time FY19 results were released in August.
Maybe I should emphasise this gap between both share price performances captures no more than eight months. That's how pronounced the differences in relative performance have been between the Haves and the Have Nots in today's share market.
And here comes the ultimate surprise: according to the stockbroking analysts covering both stocks, one is currently representing good value, and the other is not. Post the pull back in recent weeks, it is Goodman Group that looks like excellent value with the shares now trading some -14.5% below FNArena's consensus price target whereas shares in Scentre Group, despite not having performed too well thus far in 2019, are trading ABOVE consensus target price.
In days gone, both stocks would have been treated as beneficiaries from falling yields on government bonds. These days, Goodman Group is seen as a leveraged beneficiary from growth in online retailing (it is a direct contractor to Amazon) as well as from investors' hunger for yield (through the company's funds management operations).
Scentre Group, on the other hand, is facing serious fall-out from smaller retailers falling victim to changing spending patterns and competition from online, while big box retailers including David Jones, Myer, Big W and Kmart are renegotiating better leasing terms, while also reducing their floor space inside shopping malls.
Property analysts at BIS Oxford Economics recently predicted owners of shopping centres might be facing a decade of intense pressure affecting their cash flows, profitability and asset valuations. Research likes that perfectly explains as to how the broader investor community currently views the diverging growth paths, and overall risk profiles, for opposites inside the broad property sector in Australia.
As said, there are clear Winners and Losers. Value investors should not automatically assume the latter represent the better investment opportunity, not even after the gigantic gap in performance as illustrated above.
Investors should note also, Goodman Group's story has been supported by higher growth and management upgrading forward guidance while Scentre Group's earnings per shares have been trending south and still analysts see no growth acceleration on the horizon.
Quality bond proxies that have seen their growth accelerate, such as Goodman Group, but also including the likes of Charter Hall ((CHC)), Transurban ((TCL)), Atlas Arteria ((ALX)) and Viva Energy REIT ((VVR)), are not the only ones that have enjoyed the tailwind from falling bond yields in the share market.