Is the UK housing market overheating, or is it merely the latest example of froth fears that are detached from reality?
Recent home price data and the UK’s Help to Buy scheme’s early expansion already have some UK politicians and business leaders wondering—some going as far as calling for the Bank of England to cap rising home prices. Taking a deeper look, however, I see a different story: Rapid housing price gains have been concentrated in London. Restricting overall UK housing with more legislation likely won’t fix that, and it probably won’t help spread London’s gains to UK housing elsewhere. More importantly, the fact UK housing gains aren’t widespread tells me a nationwide bubble neither exists nor is particularly probable—even with an expanded Help to Buy program.
While UK housing started slowly improving after Help to Buy began in April, the program has only been lightly used in the early going—suggesting the housing recovery is coming from strengthening underlying fundamentals and isn’t purely scheme-driven. In Help to Buy’s first phase, the government promised to lend up to 20% of a home’s value at rock bottom rates (interest free for five years, 1.75% interest after) to buyers with a 5% down payment—providing up to £3.5 billion in total loans. Only first-home buyers (of any income strata) seeking newly built houses valued at £600k or less could participate. The Treasury began a second (earlier-than-expected) iteration in October, in which it guarantees 20% of the total loan to lenders, instead of lending directly to the buyer. The program was also expanded another £12 billion for buyers purchasing any home (new or not).
|By Fisher Investments Research Staff, 11/26/2013|
With interest rates on everything from savings accounts to junk bonds at or near generational lows, many income-seeking investors are looking for creative or, to some, exotic means of generating cash flow. Some are turning to a relatively little-known type of security—master limited partnerships (MLPs). MLPs may attract investors for a number of reasons: their high dividend yields and tax incentives, to name a couple. But, like all investments, MLPs have pros and cons, which are crucial to understand if you’re considering investing in them.
MLPs were created in the 1980s by a Congress hoping to generate more interest in energy infrastructure investment. The aim was to create a security with limited partnership-like tax benefits, but publicly traded—bringing more liquidity and fewer restrictions and thus, ideally, more investors. Currently, only select types of companies are allowed to form MLPs—primarily in energy transportation (e.g., oil pipelines and similar energy infrastructure).
To mitigate their tax liability, MLPs distribute 90% of their profits to their investors—or unit holders—through periodic income distributions, much like dividend payments. And, because there is no initial loss of capital to taxes, MLPs can offer relatively high yields, usually around 6-7%. Unit holders receive a tax benefit, too: Much of the dividend payment is treated as a return of capital—how much is determined by the distributable cash flow (DCF) from the MLP’s underlying venture (e.g., the oil pipeline).
When the Fed kept quantitative easing (QE) in place last week, US investors weren’t the only ones (wrongly) breathing a sigh of relief. Taper terror is fully global! In Emerging Markets (EM), many believe QE tapering will cause foreign capital to retreat. Some EM currencies took it on the chin as taper talk swirled over the summer, and many believe this is evidence of their vulnerability—with India the prime example as its rupee fell over 20% against the dollar at one point. Yet while taper jitters perhaps contributed to the volatility, evidence suggests India’s troubles are tied more to long-running structural issues and seemingly erratic monetary policy—and suggests EM taper fears are as false as their US counterparts.
The claim QE is propping up asset prices implies there is some sort of overinflated disconnect between Emerging Markets assets and fundamentals—a mini-bubble. Yet this is far removed from reality—not what you’d expect if QE were a significant positive driver. Additionally, the thesis assumes money from rounds two, three and infinity of QE has flooded into the developing world—and flows more with each round of monthly Fed bond purchases. As Exhibit 1 shows, however, foreign EM equity inflows were strongest in 2009 as investors reversed their 2008 panic-driven retreat. Flows eased off during 2010 and have been rather weak—and often negative—since 2011.
Exhibit 1: Emerging Markets Foreign Equity Inflows
With investors expecting the Fed to end quantitative easing soon, the yield spread is widening—fuel for stocks! Photo by Alex Wong/Getty Images.
Since 1932, the average S&P 500 bull market has lasted roughly four and a half years. With the present bull market a hair older than the average—and with domestic and global indexes setting new highs—some fret this bull market is long in the tooth. However, while bull markets die of many things, age and gravity aren’t among them. History argues the fundamentals underpinning this bull market are powerful enough to lift stocks higher from here, with economic growth likely to continue—and potentially even accelerate moving forward as bank lending increases.
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|By Staff, EUbusiness, 07/31/2015|
MarketMinder's View: So says the EU, further demonstrating the IMF’s hesitance to sign on to bailout number three until Greece implements more reforms and gets debt relief isn’t a huge stumbling block or game-changer. The IMF will continue participating in talks and advising on bailout terms. They just won’t agree to their own program with Greece until the EU’s program is finalized and showing some actual progress. That is basically business as usual. It doesn’t mean this will be smooth-sailing, and the tentative deal could fall through, but so far things seem more or less on track. Meanwhile, in other Greek news, this happened.
|By Justin Lahart, The Wall Street Journal, 07/31/2015|
MarketMinder's View: Sorry, but consumer spending doesn’t tell you where the economy is going. Like every other GDP component, it is backward-looking—“has happened” doesn’t predict “will happen.” To get a better sense of what lies ahead, we suggest looking at The Conference Board’s Leading Economic Index, with mashes 10 mostly forward-looking variables into one handy number. For 55 years, it has been a remarkable gauge of future trends. It rose in June and is up 16 of the last 17 months, which suggests growth continues.
|By Leonid Bershidsky, Bloomberg, 07/31/2015|
MarketMinder's View: We have no stake or interest in the debate among intellectuals mentioned in this article—we’ve overlooked it and encourage you to do the same, because in between it makes some dynamite points about Spain, Ireland and Greece. For instance: Ireland cut public spending far more than Greece, relative to GDP, yet Ireland’s economy is back to pre-crisis levels. Greece’s remains down about 25% from the peak. “Austerity is not necessarily the reason Spain and Ireland are finally recovering. It may even have slowed them down at certain points. But the two countries' performance makes it hard to accept the view … that cuts in government spending administered in crisis-hit European countries were ‘contractionary.’ The Spanish and Irish economies are growing despite stingier governments. Arguably, it makes them healthier than if they had had the opportunity to try to fix their problems by printing money.”
|By Henny Sender, Financial Times, 07/31/2015|
MarketMinder's View: Not really. The level of margin doesn’t indicate much of anything. A massive spike in margin’s growth rate can be one sign of euphoria, but we don’t have one of those today. Beyond that, this article just recycles a bunch of false fears from the past 18 months, like rate hikes, stock buybacks, rising corporate debt and bond liquidity. See here, here, here and here for why none of those should pack a bull-market-ending punch.
Market Wrap-Up, Thursday July 30, 2015
Below is a market summary as of market close Thursday, 7/30/2015:
Global Equities: MSCI World (-0.0%)
US Equities: S&P 500 (+0.0%)
UK Equities: MSCI UK (+0.3%)
Best Country: Finland (+1.1%)
Worst Country: Belgium (-3.0%)
Best Sector: Energy (+0.3%)
Worst Sector: Consumer Staples (-0.4%)
Bond Yields: 10-year US Treasury yields fell 0.03 percentage point to 2.26%.
Editors' Note: Tracking Stock and Bond Indexes
Source: Factset. Unless otherwise specified, all country returns are based on the MSCI index in US dollars for the country or region and include net dividends. Sector returns are the MSCI World constituent sectors in USD including net dividends.