Repaso a los mercados

Mark Tinker, responsable de AXA IM Framlington Equities Asia - Miercoles, 31 de Agosto

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Markets are returning from holidays and focussing on the Fed for want of any other source of direction. On balance the more hawkish tone is making investors more cautious.
There is a growing sense that monetary policy will hand over to fiscal policy. Tax cuts and infrastructure spend are likely to be the new focus for summits and election campaigns.
A combination of booming China and QE Fed booms in commodities and residential property, both now seem to be suffering from a supply/demand imbalance. Interestingly  Russia is now not only the world’s major oil producer, but also its biggest wheat producer.

Chart 1: Wheat, the cheapest in a decade.

Source: Bloomberg

The excess supply of wheat  is international and led by one country in particular: Russia. The harvest is almost in and it’s a record crop according to Prime Minister Medvedev, likely to top 72 million tonnes of which 31million tonnes are set for export,  making Russia the world’s largest wheat exporter. It is worth remembering that a ban on Russian wheat exports in 2010 following a drought was widely blamed for bread riots in Egypt and the subsequent Arab Spring (butterfly effect springs to mind).

 

Corn is similarly weak – albeit still not yet below 2009 levels.  It is worth remembering that the spikes in commodity prices back in 2010 and 2012 – as much about supply as demand – were behind much of the panic about Chinese inflation in particular and this illustrates the way that in some senses speculation can become self-fulfilling.  Panic about inflation leads to funds rushing into commodities which mechanically leads to higher prices in the short term. These higher prices lead to more investment and, in time lower prices, leading to speculation about deflation and lower prices in the short term  and so on. In commodity circles this is a well-known phenomenon, known as the ‘Cobweb’ effect (from the pattern of supply and demand curves). It is interesting to speculate as to the extent to which post the financial crisis central bankers targeting inflation both provided huge liquidity to speculators and at the same time tried to stop these short term price moves with monetary policy.

 

When looking at the importance of flows and liquidity as well as supply and demand, it was also interesting to pick up on a piece from ZeroHedge about top end house prices in the US suggesting that the flow into premium US real estate has dried up . According to the article, high end house prices in places like The Hamptons, Miami and Aspen are crashing. Volumes have halved (more in the case of homes over $10m) while prices have dropped by 20% or more.  This of course is the same liquidity issue that is driving emerging market stocks and bonds in the other direction with the added factor that governments have moved steadily to create disincentives for buyers – especially international ones.  Supply has boomed, but demand has not matched it leaving property looking like agricultural commodities.  As with commodities, many of the drivers from the China boom have faded, the Chinese themselves have been cutting down on capital flight while the collapse of commodity prices and the associated budget deficits have reduced demand from resource rich countries (and their sovereign wealth funds). At the same time governments, seemingly wanting inflation everywhere but house prices, have put on restrictions to demand as well as creating further illiquidity. Vancouver has just announced restrictions on foreign (mainly Chinese buyers), as has New South Wales, while the UK has increased transactions taxes, changed capital gains tax rules and a number of other initiatives that are hitting the top end of the property market in London. According to ZeroHedge (again) the Vancouver market has now ‘collapsed’ while anecdotally I can certainly confirm that there are now a large number of high(er) end properties for rent in London after 18 months of trying to sell into a market with no buyers. Here in Hong Kong the residential market has traditionally been far more cyclical (people still dine out on having bought property on the peak during SARS for 1/20^th of its value today) and the consensus is that the falling tide of Chinese capital will lead to a near 20% correction by next summer. As traditionally a much bigger rental market, Hong Kong tends to adjust rental yields quickly, and here again anecdotally people are securing meaningful discounts on a year ago (not me alas). So too in London where over-supply means that the implied gross yield for many buy to let landlords is below 2%, and that is before agency fees, taxes, voids and the widespread 20% discount to the asking price.

 

There is an old image in economics of the impact of too many policy initiatives without waiting for them to work through properly. It is that of pulling a house brick across a rough surface on a piece of elastic. For a long time, nothing seems to happen, then the brick pulls free of the friction of the rough surface and jumps and hits you in the face. As discount rates fell, the assumed  value of property rose, so a 5% yield became a 4% and so on such that a top end house renting at say £5000 a week in London went from being ‘worth’ £7m on a 4% yield to £17m on a 1.5% yield.  Asking prices duly followed, even if transactions didn’t and then the UK government increased stamp duty such that the tax due on that property would be almost £2m. This first stopped and then reversed the assumed uptrend in value and now the international buyer is becoming an international renter if they wish to actually live there and are keeping their cash elsewhere. Back above 2% yield, that trophy house is back to £12m and falling.

 

Meanwhile as politicians return to work, the focus in Europe (and particularly in the UK) will be exactly what form we can expect Brexit to take. As we said back in June, emerging markets have been a major beneficiary so far, partly because they are ‘not Europe’ and international investors tend to act regionally at the moment, but also from hopes of a potential stimulus to growth if the UK, as the world’s 5^th largest economy, starts trading more with emerging and frontier markets. At the same time, statements this week from  some German politicians that the Transatlantic  Trade and Investment Partnership (TTIP) between the US and Europe is effectively dead after 14 rounds of negotiations are both being blamed on the UK Brexit (the UK was a major advocate) and leading to renewed speculation on the possibility of a potential ‘UK only’ deal. As we discussed a month or so back, one plausible suggestion (actually mentioned by the US trade chief Michael Froman) could be that the UK signs up to the Trans-Pacific Partnership (TPP) the other big US promoted trade deal which is effectively agreed and  could at a stroke establish a new trade relationship for the UK with the US, Canada, Japan, Mexico,  Australia and a further seven assorted Pacific Rim countries with a  total GDP of around $27 trillion.  My view would be that stranger things have happened this summer!

 

Mark Tinker

Head of AXA IM Framlington Equities Asia

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