Our Algo Engine has the following group of REITs under buy conditions CHC, DXS, GMG, GPT, LLC, SCG, & VCX. These names all sit in the ASX 100 model portfolio.
Chart Hall Group is the best performing REIT within our models, up 54% after holding it for 574 days.
REITs have performed very well in recent weeks, due to the moderating outlook for bond yields. If yields remain under pressure, defensive asset classes, such as A-REITs and utilities will outperform through 2019.
A slowing global growth picture, low bond yields, rising equity market volatility are generally seen as positive catalysts for defensive sectors. The recent run up in these names means much of the value has already been captured. Therefore, we recommend investors use covered call options to enhance the income return.
As an order of preference, we feel large scale logistics, followed by office and then residential.
EPS growth for the sector is running around 4 -5% and dividend yields are near 5% also. Add a covered call and you’re able to achieve 10% annualised cash flow.
For more detail on covered call strategies please call of our office on 1300 614 002.
The Algo Engine triggered a sell signal in Goodman Group earlier this week. The signal resulted in GMG being removed from ASX 50 model portfolio. The position was held for 550 days with a return of 22.2%, plus an additional $0.39 in dividends.
Goodman Group has been a very strong performer within the REIT sector, with underlying EPS consistently at high single digits. The sell signal can be viewed as a cautious reminder of the compressed 3.4% yield GMG now trades on.
Yield sensitive names remain under pressure as the bond sell-off in the US continues. As bond prices trade lower, the yield is increasing. Higher yields, make interest rate sensitive names like infrastructure and property trusts less appealing.
The sell-off in domestic names such as APA, GMG, GPT, SGP, TLS, TCL, SYD, WFD & SCG has been significant. With many of these names now trading on yields within 4.5 to 6.5% range.
There’s a case to be made for the above stocks to find support as the outlook for interest rates begin to stabilise.
Over the last two months, bond markets have been repricing the probability of a US rate increase. During that time, we’ve watched the US10YR yields trade up from 1.3% to 1.9% . As a consequence, money managers have sold-off defensive yield names. This has been most evident in ASX 50 names within the infrastructure and property sectors.
We maintain a positive interest in these names as the current share prices now have many of the yields offering 100 basis points, (or 1%), more than they were trading at 2 months ago.
WFD and GMG are now trading back on 4% yield, whereas TCL, SYD, GPT and SCG are on average trading near 5% yield.
The December FOMC rate decision meeting will likely be the catalyst for a bounce, however, we’re not expecting these names to recapture the recent highs. Therefore, we’ll look to sell the rally into the early part of 2017. The algorithm engine will track these names and I’ll be certain to alert you to the next lower structural high, but for the time being, you may want to position around the short term bounce which could offer up to a 10% rally.
The recent market rotation towards growth assets and in particular, materials and financials, has resulted in selling utilities and property trusts. In many cases, these names have seen 10 to 20% correction.
The following post takes a quick look at some of the relevant chart patterns.
SCG.ASX (forward yield 4.9%)
SGP.ASX (forward yield 5.5%)
WFD.ASX (forward yield 3.5%)
DXS.ASX (forward yield 5.2%)
GMG.ASX (forward yield 3.7%)
GPT.ASX (forward yield 5%)
On the utilities, we think that both Sydney Airports and Transurban should be back on the radar and maybe looking oversold.
On the 2nd of September, we made a blog post highlighting a group of stocks to place on your watch list. Among these were a number of property trusts and their indicated buy zones. Since then, as anticipated, we’ve seen bond yields move higher and selling in defensive yield names continue. We’re now at a point where a number of the names on our preferred watch list are in the “go zone”.
This post revisits the property trust names, however, there’re other sectors too that are now showing multiple buy-side signals from our algorithm engines.