Call us on 1300 794 893

Your Money

Inside the lone wolf's head

With interest rates now giving into gravity and question marks over the severity of the local economic slowdown, it might be time to get inside the head of the big call merchant BIS Shrapnel’s Frank Gelber.
Frank is the chief economist of this respected economic survey outfit and has had a long history running his eye over the challenged building sector. That said, he is someone who has his hands on all of the pieces of the economic and investment puzzle.
Muddy media memories make it easy to forget some of his big bad calls but I vividly recall him advising me that the Asian economic crisis would not hurt Australia. He was a lone wolf on that one and he was spot on.
He took great delight reminding me recently he tipped home loan interest rates would get to 10 per cent. Of course, he was wrong — they went to around 9.6 per cent — but he was more right than most of us.
On rate cuts in the here and now, his crystal ball only sees a half-percent drop in the cash rate by the end of 2009. He is forever the lone wolf.
Some economists see the cash rate, now at 7 per cent, tumbling to 5 per cent but most are in the 6 per cent plus camp by the end of next year.
“I see a soft landing, with solid investment figures and rising agriculture exports,” he prophecized. “We still have inflation fears that will limit interest rate falls.”
To residential property and Gelber is upbeat.
“This might be the bottom with the interest rate cut bound to raise confidence,” he suggested. “Because of employment levels, there will be a quick consumer comeback.”
He believes housing is as weak as it can be and that’s why he thinks people will have two reasons to get back into the market — lower interest rates and softer housing prices.
Commercial property is his main beat and he is very keen on this asset class.
“I like property trusts going forward, though I don’t expect an instant improvement,” he said. “But as a long-term investor these are a screaming buy.”
(Gelber warns he is not advising here, just giving an educated view on what he observes.)
He believes the imperative for property asset managers to be “financial engineers” did not help the sector in the past, but given the financial shock we have been through, the time is getting better for property.
The S&P/ASX 200 REIT index was down 42 per cent since it topped out last October. However, it has had a strong run since July, up around 20 per cent. And lower interest rates should help justify this move.
“I don’t want to be quoted on a next week basis, but no one rings the bell at the end of a bear market,” he said. “However I see a rebound next year for property.”
Gelber argues the two important ingredients to drive up the value of property assets — leasing and rising rents — will both help the sector. His soft landing view also marries into this analysis.
“I prefer property because I can more easily understand the value of the underlying asset,” he confessed.
Recent work done by UBS showed that for the last two times when interest rates fell, REITS rose by more than 6 per cent in the ensuing year. My colleague in the Wealth section, Don Stammer, recently ran his rule over LPTs and had a positive view as well.
“On my arithmetic, the average income yield in prospect for 2008-09 is about 7.5 per cent and LPTs are modestly oversold,” he concluded.
Property outfits with a good exposure to the residential customer base, such as Stockland and Mirvac, could be the starting points for doing a bit of homework on this asset class.
While Gelber would not be drawn into names as BIS Shrapnel has many clients in the sector, he admitted to be favourably disposed to the well- known names.
“I recommend you look at the business model and the management before you invest,” he said.
So, what about the stock market?
Again he insisted to be quoted on a one-year basis but he is still very positive.
“I’m not in the business of picking the bottom,” he said. “But there’s a lot of great value out there at the moment.”
That said, he warns of structural changes, which could impact on returns for some companies, and affect how quickly stock prices rebound.
“If the dollar keeps falling it could affect retailers,” he said. “They have been through a golden age with low interest rates and a high dollar.”
Ultimately, the credit crunch and its impact on stock and property markets, as well as global economies, will determine what happens to shares and property-related assets.
In the absence of a shock curve ball from left field, there is mounting evidence that the assets that fill our portfolios have an improved outlook.

However, some judicious picking will be the order of the day in the early stages of the rebound. 

Published on: Wednesday, September 10, 2008

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300