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 Matthew Lynn, The Telegraph , 07/27/2015|
MarketMinder's View: By our unofficial count, the concerns highlighted here comprise roughly 87% of the bricks in the wall of worry bull markets love to climb, from Chinese hard-landing fears and a shaky eurozone recovery to the current bull market’s advanced age and seasonal circumstances ready to roil the market. Now, we’re not saying August is going to be either a good or bad month for stocks—volatility can always knock markets in the short-term—but we don’t see the bull dying in the near future, especially for any of the reasons listed here. In short, China’s domestic stock market bumpiness doesn’t equal a hard landing, the eurozone has grown despite Greece and the ECB’s quantitative easing, bull markets don’t die of old age and no one month is automatically good or bad for stocks. Also, picking out several random historical events out of context isn’t evidence that one month may be more volatile than another (though it may be a fun and educational summertime activity for the kids). Do you know what the end of World War II, the 1971 “Nixon Shock” and Russian Ruble Crisis of 1998 have in common? None of those events immediately triggered global bear market.
|By Staff, EUbusiness, 07/27/2015|
MarketMinder's View: Over the weekend, news broke that now-former Finance Minister Yanis Varoufakis had a secret “Plan B” to set up a parallel payment system, which would create euro liquidity if Greece lost ECB emergency funding and could switch to a new drachma at the push of a button—a currency transformer of sorts. To do this, Varoufakis hired an IT expert from Columbia University and had him hack into the tax revenue systems, copy the source code, and finagle a new system that would attach a new reserve account to every Greek tax ID number. Supposedly it was all ready to go in May, but when they took it to PM Alexis Tsipras for approval he quashed it. Amazingly, this story broke because Varoufakis told it to 84 financial industry bigwigs during a recorded conference call, someone squealed, and the organizers released the whole shebang online Monday. And it is a doozy, if only for sheer entertainment value, it is a must-listen. We’re personally fond of the Godfatheresque tale of brotherly love that starts at 19:51. It all sounds like a scene from a bad Hollywood thriller, and there is plenty more where those spoilers came from. For investors, it highlights Tsipras’ increasing struggle to control rebel members of his Syriza party (though Varoufakis is only loosely affiliated, not a full-fledged party member), which underscores just how difficult it will be to pass legislation to comply with bailout terms, much less implement them over the next several years (assuming he even remains in power). So we probably haven’t heard the last of “Grexit” fears. But we do know this: The likelihood Greece knocks global markets still remains close to nil.
|By William Mauldin, The Wall Street Journal, 07/27/2015|
MarketMinder's View: For as much progress as the US has made towards the Trans-Pacific Partnership, it isn’t a done deal yet. Even though it’s now in the “final round,” many variables and what ifs still persist. New Zealand is trying to milk out more favorable terms for dairy exports while Canada—and its domestic dairy industry—is sour towards that idea. Australia wants a sweet deal for its sugar exports, which US domestic interests are bristling against. The US also has beef with Japan over some agricultural products, like cattle and rice. As we’ve said before, the completion of the TPP would be a big positive for the global economy (although a huge negative for punnery), but until it actually gets finalized and completed, we wouldn’t count the chickens before they hatch.
|By Matt Egan, CNN Money, 07/27/2015|
MarketMinder's View: China’s domestic stock market isn’t a leading indicator for the economy. While China’s domestic (A-shares) stock market is on a wild ride—like Monday’s -8.5% drop—contagion fears are overwrought. For one, foreign participation in the A-share market is extremely limited, as individual investors make up less than 1% of market capitalization. A-share bear markets in 2009-2010 and 2011-2012 didn’t presage Chinese economic hard landings or a global bear market. Plus, slowing Chinese economic data aren’t surprising or particularly alarming—and in some cases, results are better than anticipated. As long as China keeps making its still sizable contribution to the global economy, that’s likely good enough to exceed dour expectations—a bullish scenario for global markets. For more, see our 7/9/2015 commentary, “About China …”
Market Wrap-Up, Friday July 24, 2015
Below is a market summary as of market close Friday, 7/24/2015:
Global Equities: MSCI World (-1.0%)
US Equities: S&P 500 (-1.1%)
UK Equities: MSCI UK (-1.3%)
Best Country: Denmark (-0.2%)
Worst Country: Australia (-1.7%)
Best Sector: Telecommunications Services (-0.0%)
Worst Sector: Health Care (-1.9%)
Bond Yields: 10-year US Treasury yields fell 0.01 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.