Fund managers are piling into property developers and financial services companies to benefit from what they see as the reappearance of the "wealth effect" in the Australian economy, after a hiatus of about five years.

"I think there is a recovery happening," says portfolio manager with Invesco, Cynthia Jenkins.

"[To benefit] it has to be domestic businesses. IT services have a lot of leverage offshore, and retail is not a powerful exposure because people are shopping online," she says.

"On the other hand, you're not going to buy a house overseas because you have a feeling of a bit of wealth."

Under the Radar has recently advocated the purchase of east coast property developer Villa World (VLW) whose shares have been running hard – they're up about 15 per cent since we tipped them three weeks ago.

Demand for its house and land packages priced at below $500,000 is growing fast because it is at the affordable end of the market – where the wealth effect is most appreciated.

Small cap fund manager Issam Eid of Sigma Funds agrees, and has invested in a number of property developers including Villa World, Peet and Sunland.

The wealth effect refers to a recovery in consumer spending led by asset price inflation. House prices are going up for the first time in five years; people see their super is higher for the first time since the financial crisis; their shares in National Australia Bank, that had seemed to be locked in at $22, are now trading at $36.

People feel happier. Asset price inflation is feeding through to confidence, which increases their propensity to spend, and the Keynesian multiplier effect kicks in.

As spending increases, some business's revenues grow. Most businesses have been reducing costs as their revenues have declined. When revenues grow, these businesses contemplate increasing their costs, or capital expenditure, to grow profits, which benefits other businesses.

Let's look at the evidence. Housing data indicates that across Australia prices of residential property are climbing for the first time in five years.

And those outside the big four banks are lining up for part of the action. This week, Macquarie Group said it was ramping up its push into home lending by paying bigger commissions to one of the biggest brokers, Mortgage Choice. What would have impressed the bankers was Mortgage Choice's comment at its AGM that its approvals had grown 19 per cent in the three months to September 30 compared with the same period last year.

Apart from housing, there have been fund inflows at some of the country's bigger fund managers, including Perpetual (PPT) for the first time in four years; as well as Henderson (HGG), and Magellan (MFF).

Cabcharge founder and executive chairman Reg Kermode might be unhappy about the company receiving a ground-breaking third consecutive "strike" against its remuneration report. But he would be pleased that taxi payments are growing 5.5 per cent in the first few months of the financial year.

It's early days to be sure, but there are promising signs that many companies' profit growth will be generated from increased sales rather than from cost cutting.

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