Macquarie downgrades the REITs + The "sticky" side of inflation

The Morning Wrap

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

Source: Investing.com

S&P 500 TECHNICALS

Source: Yahoo Finance

THE CALENDAR

Source: Forex Factory

The top item to watch for local investors is the RBA's meeting minutes. Last month, investor interest was piqued with the following line:

Members acknowledged that the arguments were finely balanced. They concluded, though, that the case to increase the cash rate by 25 basis points at the present meeting was the stronger one. 

Given the Reserve Bank didn't backflip after the late October inflation print, all eyes are now on whether they stick to their convictions or if they keep the vague language around future hikes. 

THE CHART

Source: Macrobond Financial

Coming off last Friday's US inflation report, assets rallied around the world as they had just seen the end of inflation and the beginning of Carnival. But the bad news for those hoping last week's rally will stick will need to consider this chart. 

The chart, hot off the presses from Macrobond's team, suggests "sticky" factors (i.e. services inflation) have a history of not coming down as soon as we'd all like them to. While goods inflation is petering off, services inflation continues to climb. If we've turned the corner, first we need to make sure that we've turned the corner on both parts of the global inflation story.

THE QUOTE

"Now, nearly all of the countries in the Oxford Economics database are expected to experience a slowdown next year, marking the most widespread deceleration in housing price growth since at least 2000. More than half are likely to register an outright price contraction — something last seen in 2009."  

The Financial Times has written an outstanding deep dive into the global housing market and how far prices will likely fall around the world. Indeed, housing activity has slowed dramatically in the US as the benchmark mortgage rates top multi-decade highs. In Canada's financial capital, single family home and apartment sales have crashed. And China's story is also well-known given the defaults from property developers.

For a deep dive into the Australian story, Signal or Noise is out today with its property edition:

Macro
Signal or Noise: When will Australia's property plunge end?

STOCKS TO WATCH

Macquarie's outlook for the REITs sector is in focus today, given it's downgraded most of the sector's earnings profiles. As is the case with residential prices, interest rates aren't good for yields or earnings in the commercial property space. Here is the line from the analysts:

In our view, business models will need to adjust (e.g., funding of development pipelines is difficult, additional asset sales to reduce leverage to more sustainable levels or altering funds management models). We think this will allow for better-capitalised groups to outperform in such an environment.

As a result, three REITs are getting the downgrade treatment - LendLease (ASX: LLC), Centuria Industrial (ASX: CIP), and Abacus Property (ASX: ABP). All three are now neutral-rated instead of an outperform. 

Two more REITs are not even able to hang on to their respective neutral ratings and are now underperform. They are National Storage (ASX: NSR) and Scentre Group (ASX: SCG).

But as is with so many of these broker notes, there is occasionally one glimmer of hope. There has been one REIT given the upgrade treatment. Dexus Industrial (ASX: DXI) is now an outperform instead of a neutral, thanks in large part to a superior balance sheet. 

Hans Lee wrote today's report.

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The Morning Wrap
Markets Wrap
Livewire Markets

Australia's most comprehensive markets wrap is back for 2023, with a fresh look and a new emphasis on getting you and your money ahead of the curve. Available each weekday morning at 8:30am AEDT. Written by Chris Conway, Kerry Sun, and Hans Lee.

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