Sometimes you get things right. As the stockmarket soared last year, I became increasingly alarmed about companies’ ability to match the share price growth with earnings.
I became more nervous about the prospect of rising interest rates in the US and the impact of trade tensions. Then there was the point that, in the US, once tax cuts have been introduced and the feel-good effect has gone through the economy and equities markets, what next?
So this year, after a big washout late in the year, you might expect that this is the year of bargain hunting.
Yes, it is true that those who buy well will be getting in at prices that are sharply lower than they were six months ago but the question of whether this represents good value still remains.
The same thing goes for those people wanting to immediately bargain-hunt in the property markets.
Just because prices have taken a sharp fall does not preclude further falls into the future. If you have the money and patience, all these things will eventually come good but you might have some below-par performances in the meantime.
On the property market, what seems clear to me is that we are entering an almost perfect storm for many recently built apartments.
But as with shares, it is important to try to identify apartments built by high-quality builders and developers – for it is here the genuine bargains will crop up in the next 12 to 18 months.
The issue with apartments right now is the ability of those who bought off the plan 12 to 18 months ago to settle their apartments.
This is not only true of local buyers, whose banks are taking a much stricter view of valuations, but also of Chinese buyers especially, who have been restricted in sending capital offshore but find it increasingly difficult to access local finance.
With regard to local buyers, one illustration is a person who bought an apartment off the plan for, say, $1 million with a 10% deposit. If a bank decides the apartment is now worth $880,000 (a 12% reduction) the person has a dilemma.
They can put up extra capital and, with a loan from the bank, settle the property.
If the investor is still having trouble securing the finance from their bank (for they are more risk-resistant since the royal commission) they can seek alternative finance. In the worst case – if the valuation of the apartment has gone too far against them – they can walk away from the deal and sacrifice their $100,000 deposit.
If more people fail to settle off-the-plan apartments, the pressure will then ramp up on the developers and their bankers.
While the developers are able to keep off-the-plan deposits that fail to complete, that money has already been used in the construction of the building. The developer will be under pressure from their bank to get in fresh buyers … and that’s when the price discounting often starts.
At least that’s the way it’s worked in every property bust I have seen in the past 40 years, and I see no reason why this one will be different.
In the apartment market, the trick now is to be patient and to identify well-located apartments being constructed by developers with deep balance sheets.
The better the reputation of the builder and developer, the more they will have to lose if something goes wrong. If they have a strong balance sheet, then any problems that arise can be dealt with more easily.
As an aside, though the banks have been justifiably put through the wringer by the royal commission and subsequent regulatory investigations, the advantage of having been a bank customer during this period is that they had the depth of pocket to put right the mistakes they made.
Heaven help those who dealt with organisations that were poorly financed, that simply went broke and avoided their financial responsibilities.
Perhaps in volatile times this might also be the trick to buying bargains in the sharemarkets. Identify well-resourced organisations that can withstand any downturn and have growth prospects for the future.
You see, the fundamentals of finance are often the same – no matter where you are investing.