Not much happened in overnight trade. US stocks closed near record highs while the US dollar index fell to its lowest point since November last year. That gave a bit of a boost to the gold price, but oil pulled back and, overall, commodity prices remained unchanged.
All this means is that our market is set for an uninspiring day.
So let’s step back and look at the bigger picture. Can we make out anything of interest?
Well, I did read one story that could have implications for a major part of the Aussie market in the future. Have a look at this excerpt from the Financial Times:
‘Shares in companies that own and manage US shopping malls and other retail properties dropped on Tuesday, the fourth-straight decline, amid mounting anxiety over disappointing sales at department stores and apparel retailers.
‘The S&P 500 retail real estate investment trust index dropped 1.9 per cent on Tuesday, and has tumbled 6 per cent since the end of trade last Wednesday. The seven groups listed on the benchmark have collectively shed $7.2bn in market value over the period, according to Bloomberg data.
‘The current decline deepens the fall for retail Reits over the past 12 months to 23 per cent, compared with a 3 per cent drop for the wider Reits industry. The broader market has risen 16.2 per cent over the past year.’
There are two ways to interpret this. One is that the retail sector is going through a cyclical downturn. Consumers are tightening their belts and going to the mall less often.
The other — and I think this is more accurate — is that this is a structural problem for the retail-focused real estate industry. To explain why, we have to go back a few years.
In the late 1980s, Alan Greenspan took over the Fed and relied on easy money to get the US economy out of every hole it fell into. The household sector took advantage of low interest rates and borrowed more. This led to a structural increase in consumer spending.
This borrowing and spending power resulted in a boom in shopping centre construction across the US. The ubiquitous ‘mall’ was everywhere. Going to the mall became more popular than going to church. Consumerism was the new religion.
The housing boom of the early to mid-2000s exacerbated this. Rising house prices saw consumers draw on their equity for everyday spending. More consumer spending meant more and more malls.
By the time the credit crisis hit, there was overcapacity in the retail sector. Too many shopping centres, not enough shoppers.
The post-crisis recovery helped with this somewhat. But with the increase in technology, new forms of ‘shopping’ surfaced, like Amazon and online retailing in general.
A major part of a retailer’s cost is rent. That cost is passed on to shoppers. But those with an online-only presence don’t bear this cost. They still have to warehouse the goods, but the rental cost for an industrial warehouse space is much less than a prime retail presence.
Because there are now genuine alternatives to ‘going to the mall’, traditional retailers in the US are suffering from a structural shift in earnings. And that means the companies that own and run the shopping centres are suffering too.
Have a look at the chart of Simon Property Group, the largest owner of malls in the US. Its share price is at the lowest point since early 2014. Since peaking in mid-2016, shares have fallen more than 30%.
While I think that suggests there are some structural problems with the business model, it tells you something else. It says that the current US economic expansion isn’t filtering down to the ‘man on the street’.
This is an expansion based on cheap money and technological advances, with the rewards scooped up by the already wealthy. The already wealthy tend not to make extra trips to the mall when they earn more money. The regular wage earner is being left behind by this new economy. That’s a big part of the reason why Trump, with his empty promises, held such allure to a disaffected electorate.
So what does it mean for Australia?
Westfield Corporation [ASX:WFD] is a major competitor to Simon Property Group in the US, and the biggest owner of malls in Australia. Its share price performance isn’t as bad as Simon’s, but it’s not great either. Take a look:
Like Simon, Westfield’s share price peaked in mid-2016. That had as much to do with interest rates as it did the underlying business. Because of their supposedly steady underlying earnings, these businesses are considered ‘bond-like’ in their characteristics.
So when global interest rates plummeted in the wake of Brexit in mid-2016, shares in interest rate-sensitive sectors, like real estate trusts, moved higher. (Bond yields and prices move inversely to each other.)
But that was the peak. Interest rates reversed course and so did Westfield. In recent weeks, the selloff has resumed, thanks to jitters around retail conditions in the US.
But with Amazon about to set up shop in Australia, you have to wonder whether structural forces are about to squeeze the share price even more.
The important area to watch is around $8.40. A close below here will mark a fresh low — the lowest point since late 2014. That will tell you that the market is becoming increasingly concerned about Westfield’s future earning potential.
And the stock isn’t cheap either. It’s currently trading around 20 times 2017 forecast earnings. That’s thanks to its reputation as a reliable, bond-like dividend-payer.
But if earnings falter thanks to a structural change in its business model, the bond-like reputation will disappear, and its share price will continue to fall.
So if you’re invested in Westfield, or retail-based real estate trusts in particular, keep a close eye on them. This is the next sector to potentially suffer at the hands of the new ‘information economy’.
Editor, Money Morning