On top of the world (ignore the weekend media)

World leaders

Australia rattled through a series high 25,227 COVID-19 tests over the past 24 hours.

Only one case of community transmission came to light, while current ICU cases fell even further, from 34 to just 29, so Australia's hospitals are all but empty. 

New South Wales saw 9 new cases, and Victoria 3. 

All of the other states and territories recorded donuts, and recoveries are now far outpacing the tiny numbers of new cases. 

Australia now ranks #1 in the world across the sample of OECD countries for bringing COVID-19 under control, with New Zealand in second place. 

Source: Shane Oliver, AMP

The methodology here is based upon recovery rates, cases per capita/days since the first confirmed case, the number of active cases per capita, and testing per capita.  

Consequently, the borders between Australia and New Zealand may well be opened soon. 

Stop press

Of course, it's never trendy to celebrate good news, but when it comes to a global pandemic at least we're all on the same side...or so you'd think!

I've been Tweeting the figures daily over the past few weeks, and by far the most popular Tweets were when there was a big spike in cases in New South Wales (including on one occasion when there was a spike reported in error in the preliminary data). 

Weird, but true!

On a related note, here's a weekend prediction for you: the media will be out in force tomorrow trying to take 'gotcha' photos on Bondi Beach and elsewhere with telephoto lenses to 'prove' that Australians have been ignoring social distancing rules.

On what evidence is this prediction based?

Well, this afternoon this media dude was stalking around for ages, desperately trying to find a photo angle to 'prove' how busy the beaches were in the Noosa Shire: 

In reality Queensland is regularly reporting zero cases per day of the Coronavirus from a population of 5.1 million.

Here's the reality...

No wonder trust in some parts of journalism is so low.

Have a great - and appropriately socially distanced - weekend!

April housing market report (CoreLogic)

Steady as she goes

Housing prices increased by +0.3 per cent in April according to CoreLogic. 

The biggest influence on the index in Sydney, where prices increased by +0.4 per cent, to be +3.2 per cent higher over the quarter, and +14.3 per cent from a year earlier. 

Sydney house prices were up +0.3 per cent, and unit prices were up +0.6 per cent. 

Brisbane recorded a +0.3 per cent increase. 

Two capital cities recorded modest declines, being Melbourne and Hobart.

Source: CoreLogic

Deep freeze

Prices were fairly steady in April, but that's about all of the positive market news, with sales activity dropping sharply. 

With open homes and public auctions not taking place, agents are having to work hard to get sales across the line right now. 

Source: CoreLogic

New listings are drying up, running at the lowest level in years.

Source: CoreLogic

And residential construction is slowing dramatically.

Given the resi construction sector can employ around ¾ million people there may be a need for some huge infrastructure projects to plug the hole left in the economy.

The rental market is under pressure as Airbnb lets are re-listed on the wider rental market. 

You can download CoreLogic's full monthly report here.

Sell in May, and go away

Sell in May?

One of the great market aphorisms is to 'sell in May and go away'.

Is there any truth in the adage?

From 1950 to 2013 it was certainly the case that stocks returned considerably less between May through October than from November through April. 

Maybe this hasn't held true so much in recent years. 

The trend may also not prove to the be the case this year, especially as it's a Presidential election year, which can muddy the waters. 

The reason to consider your exposure and allocation has nothing to do with the 'sell in May' theory, and everything to do with the valuations of US stocks, which remain outlandishly high, despite the unfolding recession. 

Cumulative jobless claims over recent weeks in the US have now topped 30 million.

The 'Buffett Indicator' has generally trended higher over recent decades, and you could make an argument that Gross National Product might be a more worthwhile metric than GDP in today's more globalised world.

You could also make an argument that higher valuations are justified by the relatively low returns available from fixed interest or alternative investments. 

Whatever, the point is that earnings are being obliterated at the moment, while markets have to some extent defied gravity. 

Such indicators clearly hold little use as a short-term market timing tool, but simply warn investors that if you pay too much then the returns on money invested will likely be crap. 

Low Rates High Returns Podcast: Episode 4 preview

Podcast preview

On Monday we'll release Episode 4 of our Low Rates High Returns podcast series. 

In this coming episode we discuss systematic investing, the need to have an investment plan to adhere to, and how you can manage your exposure through a full cycle. 

Here's a sneak preview:

In this episode we also introduce an initial discussion on the Kelly Criterion or the Kelly model of investing, which maximises your actual long-term wealth by boosting your geometric returns.

We come back to the Kelly Criterion in much more detail in a later episode. 

By the way, you can download a free chapter from our new book here (or by clicking on the image below):

Rates on hold until 2023...

Inflation sputters higher

Annual headline inflation hit its highest level in 5½ years in the March 2020 quarter.

The quarterly result of +0.3 per cent saw the headline result at +2.2 per cent, largely driven by tobacco and alcohol, education, healthcare costs, vegetables, and some other foodstuffs. 

The RBA never did get to hit its 2 to 3 per cent target on the core measures, though.

For the wonks, here are the figures for the analytical measures:

The underlying measures have continued to undershoot since 2015.

Despite the stronger figures this quarter, next time around in all likelihood we'll be back to  material undershooting. 

Childcare alone could wipe off a percentage point in Q2, while data king James Foster tells me that Brisbane fuel prices at the bowser plunged as low as 87.9 cents today, so that's another 0.8 or so off Q2 inflation (except perhaps in the unlikely event that oil prices bounce over the coming weeks).

This is great for consumers...it's just a shame we don't actually need any fuel at the moment! 

You can follow James Foster's detailed analysis, as always, here.

The Reserve Bank's inflation target is supposed to be 2 to 3 per cent, on average, over the medium term, but core inflation has barely troubled the target range for the past half-decade as the economy has meandered along.

Given that rates won't rise until there's 'meaningful progress' towards full employment, you can pretty much forget rate hikes for a few years. 

Holding on

Hold or sell?

There's been a fair amount of talk about negatively geared landlords, and whether they might need to sell property during the rental market disruption.

You should never judge a 20-30 year investment on what's happening right now, but it's nevertheless worth taking a look at the current state of play.

With the Airbnb sector effectively shuttered at the present time some areas have seen a 5 to 10 per cent jump in rental listings as landlords seek tenants, especially in areas that are generally popular with students, holidaymakers, or short-stay lets.

With the borders also effectively closed to New Zealanders, tourists from China and India, and international students, there's likely to be a scramble for tenants over the coming months.

On the flip side, of course, Aussies aren't heading overseas either, so the net effect is less pronounced.

The New South Wales State Government looks set to do its part with the apartment overhang by buying up unsold new apartments from developers. 

The compensating good news for landlords is that some of the available mortgage rates have plunged over recent months.

The latest figures aren't available yet, but when they are they'll probably show that interest cost serviceability is back to where it was about 35 years ago.

Some of the 'rack rate' variable mortgage rates are still unreasonably high for investors, but for those taking a  moment to shop around rates may now be very low indeed. 

New owner-occupiers can secure mortgages from close to 2 per cent in some cases, while rates tend to be higher for investors. 

A lot of the statistics quoted on the number of negatively geared landlords are years out of date (the figure was 1.3 million in 2016-17, but interest rates have nosedived since then, so the figure would be lower today). 

Even assuming flat rents, a stylised model suggests that net rental losses will now be the lowest in years.

Most investors own one rental property, and the average net rental losses will probably be about $1,000 to $1,500. 

The detailed Australian Taxation Office statistics do show that many of those investors aged between 30 and 60 choose to hold an investment property with a reportable net rental loss of between $5,000 and $10,000 per annum, partly to reduce their income tax payable. 

Generally this cohort tends to be the white collar set, earning solid incomes in relatively speaking more secure positions.

Depreciation report (MCG)

Moreover, the net rental loss reported to the ATO is not the same thing as the investor's cashflow.

In fact it's possible to be negatively geared from a taxation perspective but still to have a positive cashflow, due to on-paper depreciation benefits and capital allowances. 

MCG's 1000 Assets 2020 report showed that there was a big increase in investors buying new property over a period of four years through the construction boom.

These investors tend to receive very significant depreciation benefits, but I expect there will many investors in this cohort facing negative equity as brand new property tends to...well, depreciate.

MCG's study also found that investors have become more aware of depreciation benefits, and as a result they're claiming deductions sooner than they used to. 

Source: MCG Quantity Surveyors

Some property investors will choose to sell, of course.

But the number of forced sellers will be lower than otherwise would've been the case due to record low mortgage rates, while borrowers have also been extended the option to switch to interest-only loans or take a 6-month repayment holiday. 

A couple of years ago many reports suggested that the interest-only reset would lead to a spike in mortgage arrears, but owners adapted and arrears barely moved. 

Lucky country gets lucky again

Property searches surge

Cameron Kusher, now at REA Group, posted an interesting piece on property searches here, which have suddenly spiked again to be some +37 per cent higher than a year earlier. 

There was a notable plunge after the rollicking start to the year, as the shutdown kicked in, but now searches have really been hotting up again.

This has previously been an interesting and useful lead indicator on what's to come for property transactions, as we saw after the May 2019 election and at the beginning of 2020 when markets were surging ahead at a double digit pace. 

Source: REA Group

The increase was mainly driven by Victoria and New South Wales.

Searches for places to rent have followed a similarly rebounding trend at the national level, albeit in a far less acute fashion.

This accords with what we're seeing, which is buyers cautiously returning to searches that they'd previously put on hold.

Why so?

Restrictions eased

The most likely explanation is simply that Australia's containment of COVID-19 in Australia has to date bordered on miraculous, and the states are now set to gradually ease back restrictions on movement. 

There were only seven confirmed cases of COVID-19 across Australia yesterday, and most new confirmed cases are now in known clusters rather than from community transmission.

Remarkable.

Today looks likely to show a similar result from perhaps 15,000 tests, with most states and territories now running at zero or somewhere very close to it. 

Less than a month ago, one report suggested Australia might have the 'world's worst management' of the virus, and yet now it has transpired that our results are among the very best in the world, alongside New Zealand. 

Whether that's by luck or by judgement - or most likely a bit of both - may only be known in the fullness of time.

As to how this is impacting real estate searches, there are three main factors to bear in mind.

Firstly, there are now record low mortgage rates for new borrowers, from just over 2 per cent, and these look set to persist for at least three years. 

Secondly, there's now some potential return for a return of the cobweb effect we saw before the election last year, which may kill new supply, at least in tightly held or blue chip areas. 

Dwelling starts look set to slump to around a 70-year low, and while plenty of aged listings remain on the market, quality new listings are now rather thin.

For example, Real Estate reported that there was just one new apartment listing in Coogee over the course of a week, which is exasperating for anyone wanting for take advantage of the slowdown.

And thirdly - a point I've alluded to previously - while Canada, the US, and many developed European and Asian countries have grappled with the spread of the virus, the two countries which are emerging with enhanced reputations as the most desirable to live appear to be New Zealand and Australia. 

A 'Lucky Country' indeed.

What to invest in, and when (Low Rates High Returns Podcast, Episode 3)

Stock picking

There's nothing wrong with investing in individual companies to invest in, and we still do this today.

But we have learned from painful personal experiences over the years that trying to pick the 'next big thing' can be fraught with danger when the growth wagon stops.

Even the biggest growth success stories of recent decades (think Amazon) have experienced enormous drawdowns, making it deceptively difficult be a successful stock picker consistently, and to stick with the selections through thick and thin. 

And making a mistake can result in a permanent loss of capital.

If rule #1 of investing is 'don't lose money', this is of course what we want to avoid.

Market mispricing

Instead of looking to pick the next big growth stock, we instead look for a market mispricing.

That is, the opportunity to buy a dollar for 50 cents, or as close to 50 cents as possible.

This in turn tends to lead us to the big, mature, and profitable systemic companies, which will throw off huge income streams between now and doomsday.

If you can look towards out-of-favour sectors in out-of-favour countries then this can lead to you to some very lucrative long-term investments.

For example, at the time of writing you might look at telcos, energy, tobacco, consumer staples, or healthcare companies, with the opportunity to harvest consistent 6 to 8 per cent income streams. 

Companies with high leverage or levels of gearing may be best avoided, to manage risk.

Much of Buffett's great genius over the years has simply been displaying the wisdom and patience to look for such proven performers, and the opportunity to buy them at an attractive price. 

And remember the Lindy principle: if a business has been around for 50-100 years and has proven itself to manage capital prudently profitably through multiple cycles, then it's a fair bet that it can continue to do do for another 50-100 years.

Risk hierarchy

The good news is that you don't need to be a stock picker these days if you don't want to be, as you can use indexes or ETFs to invest in countries or sectors. 

Generally speaking, we look towards countries and sectors that are cheaper than their long-run average, rather than more expensive, for obvious reasons.

If you take a global approach there will always be opportunities to buy low (and, later, sell high), every year. 

But as discussed in the previous episodes, it's critical to observe the macro environment, particularly with regards to the US market. 

The US accounts for about half of global market cap and is known to be the single biggest influence on equities markets around the world.

Thus when the US is expensive you need to be aware of the prevailing downside risks and adjust your asset allocation according to your plan. 

When the US market is cheaper, then generally speaking the macro risks for equities may be lower.

Low Rates High Returns podcast

You can listen to Episode 3 of our Low Rates High Returns podcast here at Apple iTunes (or by clicking on the image below): 

You can also tune in at Spotify, Stitcher, or Soundcloud. 

By the way, you can download a free chapter of our book here (or by clicking on the image below), and pre-order a copy of the book from Dymocks here: