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Winston's Weekly: Outcome of US Fed meeting

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2024-06-14

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The following transcript was AI-generated.

Manny Anton: Good morning, and welcome to this week's edition of Winston's Weekly, covering all things property. I'm Manny Anton, the host for today's property chat. Winston, as always. Welcome back.

Winston Sammut: Thank you.

Manny Anton: Nice shirt.

Winston Sammut: Thank you.

Manny Anton: Alright. Let's start with what we usually start with, which is the US markets. So, we've had another busy week on the data front out of the US. This week we saw the fed policy meeting, and as expected there was no change to interest rates. There was some commentary though, which did suggest they are seeing some improvement on the inflation side. But clearly, given their commentary, it's clearly not enough at this point, for them to go hard, in terms of the rate cutting plan. So it looks like the three rate cut scenario is now very much off the table. There seems to be a shift towards, the markets expecting perhaps one now, rather than that three rate cut scenario. We also had some May CPI numbers out in the US, this week. Which came in slightly below expectations. Now the market liked that, as you'd expect, and we saw yields fall again. And in fact overnight, last night, we saw PPI numbers - which also came in softer than expected. So, below consensus. And what we saw is again yields came off overnight. I think the US ten-years were trading below 4.25%. So that's a considerable fall from where we were at a couple of weeks ago.

Winston Sammut: Yeah, but we've had an interesting week because we go back to last Friday night where we had some employment numbers that came out which showed that US economies continue to grow quite well, quite strongly. The market took that as a negative and bond yields rose. And then a couple of days later we had the CPI numbers, which basically came in benign. And from the comments that the fed made, there is a difference approach, or a different outlook, in terms of what the fed is looking at as opposed to what investors are looking at. Investors seem to be moving from one data point to another data point and reacting to that particular data point. In the fed comments, what they basically said is that they're looking at a range of data points, that combined, will give them confidence about cutting rates. And those data points together aren't looking all that good in terms of having an early rate cut.

So, the expectations are now that there'll be one rate cut this year, probably in December, which effectively moves it out of the period of the U.S. election in November. Other interesting [points] to keep in mind is that the next fed meeting is about six weeks away. So that takes us into sometime in August. And there'll be obviously a number of data points released over that period of time. So markets are concentrating on one point at a time, whereas the fed is looking at all of them. And as you say, it's not looking all that positive for multiple rate cuts this year. So they might have to wait until the following year for any direction as to any further moves. But what it does do for the Australian market is, it basically, continues to push out rate cuts in Australia, certainly until the end of this year at least.

Manny Anton: Yeah I agree. It's certainly looking that way. Okay, let's turn our attention to domestic markets. Now, a question for you - It's been in the news a fair bit, private credit. Now, obviously, there's considerable amount of property involved in that space. But private credit - There seems to be a lot of people chasing exposure to private credit, and there seems to be quite a few private credit funds getting up at the moment to feed that sort of demand. What are your thoughts on the private credit and as it relates to property?

Winston Sammut: Private credit seems to be the buzz word at the moment. And as you said, there are quite a number of offerings around the place. We're actually getting hit with quite a few offerings. And it's primarily because the banks seem to be stepping away a little bit, from providing credit to some of the developers and some projects. So there's space for them at the moment. My view is that basically you have to look at the risk reward equation. And when you're getting a return of 7% - 7.5%, 8% - 8.5%, really anything under 10% - Is that premium over and above what you can get on cash adequate for the risk you're taking? And to my way of thinking, I don't think it is, in this current environment. So, if there are offerings above that 10% threshold, they're probably the ones that are worth looking at. But obviously, the higher the rate goes, the higher the risk. So you've got to be comfortable with the risks. But there are certainly a lot of offerings at the moment, and everyone seems to be chasing private credit as an alternative in terms of moving some money out of other equities, or fixed interest, into that private credit score sphere.

Manny Anton: Yeah, so is your view, that at this point, from what you're saying, is that risk being mispriced, from what you've seen?

Winston Sammut: Well, I think so, because primarily what you are doing in a lot of these funds is you're actually locked in for a period of time. I mean, there is a listed entity; Qualitas Real Estate Income Fund, which has got daily liquidity, and its yielding around 8%. Now, to me, that compared to a private credit where you're locked in for a period of time at 8% - 8.5% or 9%, you you're better off in the 8%, which paid monthly, by the way. You're better off in that environment where you can actually get out on two plus two, because it's listed.

Manny Anton: Yeah.

Winston Sammut: As opposed to being locked into a fund that you're in for 2 years, 3 years, 5 years, whatever the term might be.

Manny Anton: And how is that Qualitas stock performing?

Winston Sammut: It's performing - It's pretty well in line with, the stock's trading around 161/162. It's pretty well trading in line with NTA. As I say, it's daily liquidity and it's monthly income. So, to me, that's that's a reasonable sort of exposure compared to a private credit fund where you are locked in and might be getting 8 or 8.5.

Manny Anton: Yeah. What's the typical length or duration of that lock in for private credit? I know it'll probably vary but...

Winston Sammut: Well there are those that offer a short term, whether it's sort of 12 to 24 months, 3 years max.

Manny Anton: ...and you're very much locked into those?

Winston Sammut: You are locked into those for that period. That's it. Well, you you may be able - you can try and get out, but it's at best endeavors. They have to find a buyer on the other side, which is difficult to do at times, depending on where you are, and then the pricing and transparency.

Manny Anton: Transparency obviously in those private markets as well... There is little transparency. They're pretty opaque, but okay understood. Okay. So before we move on, the next one I want to raise is Lendlease. Now that we've talked about Lendlease before, and we discussed recently their announcement that they would look to exit their offshore ventures. Now, that's been in the press, they've made it clear that that is the strategy they're looking to divest their offshore ventures. The stock initially did quite well on those announcements, but has since reversed a lot of that performance, and in fact, is now lower than when the announcements were made. It's currently trading at sub $6 -

Winston Sammut: It's currently trading around $5.50/$5.60. After the announcement it got up to $6.50, and there was a lot of positive vibes and also maybe some short covering in that area. What's happened since, is there's the perception and there's reality. The strategy and the perception is to sell these assets over time. The reality is they've got to find buyers. And in this environment, it's getting difficult to find buyers to buy businesses that are in construction, that are half way through or a third of the way through the project. They've got to pick it up and take it from there. It's not an easy task. And I think there's a realisation, that even though that's the strategy, it'll probably take longer than expected. And they want to see some runs on the board. So, I think that's the reason why the stock has come back.

Manny Anton: Okay. Do you see it as an opportunity as a buying opportunity for Lendlease? Or not yet?

Winston Sammut: Not yet, because there's still some issues; management issues, the board issues. I think it's not quite the time yet.

Manny Anton: Okay, understood. Well, then looking forward to next week, is there anything coming up on the horizon we need to be aware of in property land?

Winston Sammut: Not specifically, but I expect from next week, because we're two weeks away from the end of the financial year. And given that June is a distribution time for the REIT's, we should start seeing some announcements about distributions for the June quarter. My expectations are that they will hold up reasonably well. There wont be a lot of change in that area. But what the market will want to focus on, over time, which will probably be August, is the management comments when they release the results for the year. And in particular where valuations are going. There is talk, expectations, that valuations in general are still under pressure, and we'll probably see values come down by about somewhere between 5% - 7%.

Manny Anton: So in terms of subsectors, will a large part of that focus perhaps be on office? The obvious ones that have struggled...

Winston Sammut: Very much so, on office. There's talk that there's likely some transactions, going to take place, which give us a bit of a look as to where we valuations could be. But, I mean, these expectations have been there for a while, and we haven't seen those transactions, so who knows.

Manny Anton: Okay, understood. Alright Winston, well thankyou for your time and your insights today, as always. And, we will be back with another edition of Winston's Weekly next Friday. Until then, have a great day and a great weekend.

Winston Sammut: Thank you.



Disclaimer: Sequoia Financial Group (ASX:SEQ), the parent company of Finance News Network, owns a 20 per cent interest in Euree Asset Management.

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