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 Lingling Wei, Chao Deng and Shen Hong, The Wall Street Journal, 06/26/2015|
MarketMinder's View: China’s domestic or A-share markets have fallen sharply all week, and the typical cheerleading from officials published in Xinhua is conspicuously absent, leading some to fret the government is cooling on promoting stock market investing as an alternative to real estate and dodgy wealth management trusts (basically, securitized loans). But the impact of this is likely very limited. For one, the A-share market is largely off limits to foreign investors, who buy mostly domestic shares listed in Hong Kong (H-shares). While H-shares have gone up nicely in the last 12 months (~50% at their peak), that is a far cry from A-shares 162% peak gain. Similarly, while A-shares entered Friday down -12%, H-shares were down -2.5%. Domestic Chinese investors may have been swept up in the big returns, but foreigners remain skeptical. And contrary to the article’s assertion that “Regulators are keen, however, not to spark a prolonged fall, which would have repercussions for the broader economy,” A-share markets are notoriously volatile and do not act as much of a forward-looking economic indicator. There have been two bear markets in Chinese A-shares since 2009. The economy has grown at a solid clip throughout, even accelerating during the first, which ran from mid-2009 through mid-2010. A-shares’ big swings don’t have a global reach.
|By Helene Fouquet and Patrick Donahue, Bloomberg, 06/26/2015|
MarketMinder's View: Yeah, well, maybe this weekend is “decisive” and maybe it isn't. After all, as has been widely reported, missing Tuesday’s IMF repayment will not qualify as a default, technically. The next payment is due to the ECB by July 20, and it is probably more important. Besides, there is also the distinct possibility the troika kicks the can forward and extends the existing bailout by five months, teeing up a Grerun or Grepeat in the fall. Either way, though, we'd suggest not overthinking this one—there isn't any sign Greece is contagious, and absent that, it should have roughly the market impact of the 2013 Detroit default: minimal.
|By Mark Schoeff, Jr., InvestmentNews, 06/26/2015|
MarketMinder's View: Well, we aren’t so sure the House and Senate slapping an amendment onto an appropriations bill that hasn’t been voted on by either full chamber is so “unstoppable,” particularly considering the White House backs the DoL proposal and President Obama can simply not sign the law. But either way, we’d suggest most of the claims brought by both sides in favor of and against a broad fiduciary rule are overwrought. The DoL’s rule isn’t “sweeping” at all—it permits all forms of compensation and waters down the SEC’s version. The impact to small account holders is likely nil. And the DoL’s version will do very, very little to better “protect investors.” The fiduciary standard in even the SEC’s form requires advisers to reasonably believe they are putting clients’ interests first. A subjective standard! Investors must do the requisite due diligence to understand the values, structure, experience and expertise of the firm they are working with. There is no shortcut to ensuring the advice you’re getting is adding value.
|By Jonathan Weisman, The New York Times, 06/26/2015|
MarketMinder's View: This is the second trade-related bill to make its way through the House in recent days, this one expanding the trade-adjustment assistance program, which aims to retrain and compensate American workers deemed displaced by trade. It is likely to become law, as trade-promotion authority already did. However, we’d suggest some of the other nuggets noted in this article—the discussion of currency manipulation and anti-dumping bills—support the notion any deal on the Trans-Pacific Partnership (TPP) still faces a stiff fight. And that assumes the 12 nations in the talks actually come to an agreement. While we would welcome being wrong here (because the TPP would be good for stocks and the economy, in our view), we are skeptical the TPP becomes a reality soon.
Market Wrap-Up, Friday June 26, 2015
Below is a market summary as of market close Friday, 6/26/2015:
Global Equities: MSCI World (-0.3%)
US Equities: S&P 500 (-0.0%)
UK Equities: MSCI UK (-0.8%)
Best Country: Italy (+0.2%)
Worst Country: Australia (-2.6%)
Best Sector: Consumer Discretionary (+0.1%)
Worst Sector: Information Technology (-0.9%)
Bond Yields: 10-year US Treasury yields rose 0.07 percentage point to 2.47%.
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.