Why this outperforming sector could be next to suffer a major downturn

The property market may be losing stream fast but it's the home renovations market that's next to roll over, according to UBS. Here's what you need to know.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The property market may be losing stream fast but it's the home renovations market that's next to roll over, according to UBS.

This is a counter consensus call and even UBS admits it is early in making this bearish prediction, but if the broker is right, it will spell bad news for the share prices of stocks exposed to this industry, such as Wesfarmers Ltd (ASX: WES), DuluxGroup Limited (ASX: DLX) and Metcash Limited (ASX: MTS).

Apart from Metcash, these stocks have been outperforming the market with Wesfarmers (the owner of Bunnings Warehouse) rallying 22% and paint supplier DuluxGroup jumping 12% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 9%.

Hardware chain owner Metcash would be outperforming too if not for its shock profit downgrade for its grocery business in May, but even then, the stock is up 7% over the same period.

However, it might soon be time to start locking in profits as UBS noted that the lead indicators for renovations have suddenly slumped!

"Over the last year credit tightened and home prices fell, but only recently is this negatively spilling over to renovations," said the broker.

"A broad retracement in lead indicators of renovations suggest activity is about to roll over."

These lead indicators include the 8%-10% year-on-year (YoY) drop in new and established home sales to its lowest level in 20 years, declining property listings as confirmed by REA Group Limited's (ASX: REA) results, a circa 20% YoY slump in owner-occupier loans for alterations and additions (A&A) and the 9% drop in A&A building approvals in June after months of solid growth.

This warning runs contrary to conventional thinking as history has shown that the renovations market tends to outperform when home sales hit a soft patch.

We are also not seeing signs of any real weakness in household fittings and furnishings. If anything, this category is up and I have even recently written about how bathroom fittings company Reece Ltd (ASX: REH) would be well placed to weather the housing downturn.

But I think it pays to keep a closer eye on further signs of trouble in the renovations market as UBS believes it is only a matter of time before we see sales of household goods drop.

Further, an easing in the renovations market doesn't necessarily mean big profit downgrades either. There's still every chance that the renovations market will only suffer a relatively mild downturn.

Those worried about UBS' bearish outlook may prefer to look elsewhere for opportunities. The experts at the Motley Fool have picked three of their best blue-chip stock ideas for FY19 and you can find out what these stocks are for free by following the link below.

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Woman in celebratory fist move looking at phone
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A young man pointing up looking amazed, indicating a surging share price movement for an ASX company
Broker Notes

These ASX 200 shares could rise 20% to almost 30%

Analysts are tipping these shares to deliver big returns over the next 12 months.

Read more »

A young woman carefully adds a rock to the top of a pile of balanced river rocks.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

Energy and utilities stocks led the way last week with 4%-plus gains.

Read more »

Animation of a man measuring a percentage sign, symbolising rising interest rates.
Share Market News

Here's when Westpac says the RBA will now cut interest rates

Will borrowers need to wait until the middle of next year for relief? Let's find out.

Read more »

Boys making faces and flexing.
Opinions

3 ASX 300 shares to buy and hold for the long run

I believe these stocks have loads of growth potential.

Read more »

Young girl drinking milk showing off muscles.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a great end to the trading week for ASX investors today.

Read more »

Hands reaching high for a trophy with a sunset in the background.
Record Highs

The ASX 200 Index is on its way to another all-time high today. Here's why

These blue chip stocks are driving the index towards a new record today...

Read more »

Group of friends trading stocks on their phones. symbolising the 3 most traded ASX 200 shares today
Share Market News

3 ASX mining stocks topping the most-traded list in October

Chinese stimulus news and company announcements likely contributed to the higher trading activity.

Read more »