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The ASX sectors facing downgrades as Chinese investors flee Aussie property market

Pauline Hanson’s One Nation should be careful of what it wishes for. Those wanting to kick out Chinese property investors for driving up house prices will be cheering news that these investors are fleeing from our market.

Data from the Foreign Investment Review Board (FIRB) shows that the number of Chinese investors seeking approval to buy all types of properties in Australia has halved, according to the Australian Financial Review.

Brace yourselves Fools! This has wide spread implications for the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) that will extend beyond the property sector and we could see earnings downgrades for our market later in 2018.

The data backs up a prediction by UBS that the peak in Chinese investments is behind us after the broker surveyed investors from the Chinese mainland.

You can credit (or blame) tightening Chinese capital controls and increased fees and taxes on foreign investors for the exodus.

Regardless of how you look at it, the exit of this large buying group comes at a time when domestic demand for residential properties is slipping due to stricter credit approval processes by the banks, which are under fire by the Banking Royal Commission for having lax standards.

UBS is predicting a 5%-plus fall in Australian house prices in 2018 and flat growth for 2019, but that forecast was made before the FIRB data was released.

This means the risk of a worse than expected slowdown cannot be ruled out and it won’t only leave property stocks like Mirvac Group (ASX: MGR) and Stockland Corporation Ltd (ASX: SGP) swimming in the nude when the tide pulls out.

Property prices are heavily correlated to consumer sentiment and consumers drive more than two thirds of our local economy.

One sector that will feel the pinch of a property slowdown is automotive retail. UBS estimates that a 10% drop in house prices will lead to a circa 10% drop in new auto sales and a circa 8% decline in luxury car sales over a two-year period.

This has prompted the broker to downgrade its recommendation on Autosports Group Ltd (ASX: ASG) to “neutral” from “buy” as it cut the luxury vehicle dealership’s FY19 earnings per share (EPS) forecast by 21% and reiterated its “neutral” rating on Automotive Holdings Group Ltd (ASX: AHG) as it lowered its FY19 EPS by 12%.

A falling property market will also lead brokers to cut their forecast for our listed retailers. Citigroup is urging investors not to wait and sell electronics and home appliances chain JB Hi-Fi Limited (ASX: JBH) after receiving negative feedback from JB Hi-Fi’s suppliers.

Pressure from online rivals is increasing and that is also bad news for furniture and electronics retailer Harvey Norman Holdings Limited (ASX: HVN) with the company more exposed to the property cycle.

The good news is that there is a sector that is tipped to power ahead regardless of the housing market. The experts at the Motley Fool are bullish on the outlook for this niche sector for 2018 and beyond.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Automotive Holdings 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.

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