How to invest before, during, and after the storm

Wednesday, 4 October 2017
Melbourne, Australia
By Bernd Struben

  • House prices always go up…until they don’t
  • Explosive potential

Hurricane Harvey flooded Houston in August.

Then Hurricane Irma slammed into Florida in September.

At the time, I imagine that few residents were reviewing their stock portfolios. Their primary concern was getting themselves and their families to safety. And securing their properties.

Yet natural disasters of this magnitude can have a huge impact on stock prices. And a few strategic adjustments to your portfolio could have seen a big bump in your returns.

At the moment, the overall impact of the storms is lifting US markets.

That may seem counterintuitive. But it’s going to take a lot of material, money and labour to rebuild and resupply the storm ravaged areas. And spurred on by the coming wave of investment, all three major US indices closed at record highs yesterday. Again.

From The Australian Financial Review (AFR):

The three major US stock indexes and the Russell 2000 posted record high closes for the second straight day on Tuesday, helped by gains in airlines and as carmakers rose after strong September vehicle sales.

Major auto makers posted higher US new vehicle sales in September as consumers in hurricane-hit parts of the country rushed to replace flood-damaged cars…

General Motors’ shares rose 3.1 per cent and hit a record intraday high, while Ford’s stock was up 2.1 per cent.

Up to 500,000 cars were damaged or destroyed during Harvey and another 200,000 cars during Irma, according to industry estimates.’

700,000 cars damaged or destroyed in the two storms. That figure is staggering.

And a one day rise of 3.08% in General Motors Company [NYSE:GM] is impressive. This is a company with a US$63.3 billion market cap, after all. And the share price is now up 27.16% over the past six months.

Insurance companies, on the other hand, have mostly been tracking in the opposite direction. I mentioned this in Port Phillip Insider back in August, when Harvey was still centred on Houston. At the time I wrote, ‘When natural disasters strike, insurance companies take some of the biggest hits.’

That’s certainly been the case with QBE Insurance Group Ltd [ASX:QBE]. The $13.7 billion insurance giant has exposure to both US storms. It’s also exposed to last month’s Mexican earthquake and Cyclone Debby, which struck Queensland in March.

Expectations are rising that the company will operate at a loss this year. And investors have punished the stock. QBE shares are down 16.7% since 16 August, and 21.57% in six months.

There’s nothing prescient about predicting who’s likely to gain or lose following a natural disaster. It’s simply a matter of taking a few steps back from the day’s big events. Then thinking about the likely impact they’ll have on various companies down the road.

When it comes to hurricanes, construction companies and their suppliers should see a lift along with carmakers. As should businesses manufacturing and selling white goods and furnishings. Those will need to be replaced in tens of thousands of homes.

So now we see how the storms have provided a tailwind (sorry) for US stock markets. But what’s the story here in Australia?

We’ve had cyclones and floods and fires too, darn it. Yet the ASX 200 isn’t going anywhere. As at writing the index is down 0.73%. That brings it to a loss of 3.29% over the past six months.

Even the Reserve Bank of Australia’s decision yesterday to keep interest rates at a record low 1.5% wasn’t enough to cheer investors.

So, where to then for returns?

We’ll get back to that, right after the markets.

Markets

Overnight, the Dow Jones Industrial Average rose 84.07 points, or 0.37%.

The S&P 500 gained 5.46 points, or 0.22%.

In Europe, the Euro Stoxx 50 index finished up 3.04 points, or 0.08%. Meanwhile, the FTSE 100 climbed 0.39%, and Germany’s DAX index was closed for the Day of German Unity holiday.

In Asian markets, Japan’s Nikkei 225 index is up 48.10 points, or 0.23%. China’s CSI 300 is closed all week for the Mid-Autumn Festival and National Day holidays.

In Australia, the S&P/ASX 200 is down 41.44 points, or 0.73%.

On the commodities markets, West Texas Intermediate crude oil is US$50.05 per barrel. Brent crude is US$56.00 per barrel.

Gold is trading for US$1,273.06 (AU$1,624.22) per troy ounce. Silver is US$16.65 (AU$21.24) per troy ounce.

One bitcoin is worth US$4,322.47.

The Aussie dollar is worth 78.38 US cents.

House prices always go up…until they don’t

Until recently, when asked where to look for returns, you couldn’t go wrong with the Sydney or Melbourne property markets.

First, secure a big, low interest rate loan in the right neighbourhood. Second, find a renter to pay off your mortgage. Third, watch the property price rocket upwards.

But that formula looks to be running out of steam.

Sydney house prices fell 0.1% in September. That’s the first fall for Sydney since 2015.

And though Melbourne prices are still on the rise, the rate of growth is well down from last year.

As the AFR reports (with data from CoreLogic):

House prices in Sydney fell 0.1 per cent over September, the first fall since late 2015, when the Australian Prudential Regulation Authority imposed a 10 per cent growth limit for investor loans…

The overall quarterly rise of 0.2 per cent for Sydney was also much smaller than 3.5 per cent last year, reinforcing the cooling in Australia’s most expensive residential market…

Melbourne’s house prices were stronger, posting a 0.9 per cent rise for the month, but still cooler against last year’s 2.3 per cent monthly rise.’

Look, this is hardly a housing crash. Simply the slowing we need to have. While I firmly believe a crash remains on the cards, we’ll need to see interest rates move up by more than a quarter percent first.

And you’ll want keep an eye on those employment figures. If jobs start drying up alongside flat wage growth…look out.

But with property price growth slowing or negative, and the ASX 200 going nowhere, the question remains. Where to for growth in Australia?

Explosive potential

If you read yesterday’s Port Phillip Insider, you may know where I’m going with this.

And that’s to recommend you have a look at the smaller end of the market.

Now small-cap stocks do tend to be riskier. Just as they can go up in price in leaps and bounds, some can also take a rapid tumble. Which makes it extremely important to be fully informed about a small-cap company before investing in it. As opposed to investing in a blue chip stock like Westpac [ASX:WBC].

This is where small-cap investing expert Sam Volkering’s advice can make the difference between watching your small-cap stock’s share price explode…or implode.

As the editor of Australian Small-Cap Investigator, Sam’s track record speaks for itself. Some of the returns readers of Australian Small-Cap Investigator have already bagged include 243% from LNG Ltd and 458% from Bow Energy.

As Sam points out, those aren’t paper gains either. That’s where he recommended readers sell their shares and put their profits in the bank…or into his next promising small-cap recommendation.

And speaking of his next promising small-cap recommendations, Sam has just released a new report with what he calls three ‘shock proof’ stocks. These are stocks that should be able to do well in any market conditions.

Stocks the market massively undervalues. Stocks the big fund managers simply can’t access, because the stocks are too small to absorb the millions of dollars the fund managers shuffle around. Stocks that could go up many times in short order, even if the ASX 200 continues its slide.

In fact, Sam believes the three shock proof stocks he profiles in his new report could make you returns of 506% by December 2018. Take that, NASDAQ.

If you haven’t checked them out for yourself yet, you can do so here right now.

Cheers,
Bernd