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 Adam Shapiro, FoxBusiness, 08/03/2015|
MarketMinder's View: Let’s clear up some misperceptions about the implications of a Puerto Rico default. While it’s true some notable bond mutual funds and hedge funds hold a big chunk of Puerto Rican debt, only a couple of muni bond funds have outsized positions—unless the majority of your portfolio is in Puerto Rican debt, your pain will be limited. Second, many Puerto Rican bonds are insured, which likely means bond insurers work out deals to stave off default for as long as possible. Third, Puerto Rico’s potential fallout on broader markets is limited—its economy is half the size of Detroit, and if Detroit didn’t roil muni markets when it went bankrupt in 2013, we fail to see how Puerto Rico will do so either. Fourth, most of this is old news to markets—Puerto Rican yields have been elevated for a long while (prices fall when yields rise). Though the commonwealth’s issues are real and its struggles will persist, “average Americans” just aren’t likely to get knocked much (if at all) by a Puerto Rico default. For more, see our 7/8/2015 commentary, “Puerto Rico Can’t Afford Its Debt.”
|By Richard Barley, The Wall Street Journal, 08/03/2015|
MarketMinder's View: While this piece isn’t perfect, it does highlight how Greece’s problems truly are its own and why eurozone contagion fears are overwrought. The eurozone periphery outside Greece—Spain, Portugal, Ireland and Italy—is well on the road to recovery. Ireland and Spain are among the region’s fastest-growing economies, and Irish GDP is back at pre-crisis levels. Portugal and Italy have also resumed growing, albeit at slower rates. Greece, on the other hand, is likely back in recession, the degree of which will be known later this year. With The Conference Board’s Leading Economic Index (LEI) for the eurozone up 0.4% m/m in June, the region’s uneven, choppy growth looks likely to continue, despite Greece’s longstanding struggles.
|By Patrick Gillespie, CNN Money, 08/03/2015|
MarketMinder's View: We agree with the general tenor of this piece—we’re optimistic about the US economy and market too! But not for the reasons laid out here, which are mostly backward-looking—handy confirmations of what has happened, but not telling about what will happen. For example, employment data tell you what businesses did in the recent past—they tell you nothing about what’s to come. Same with consumer confidence, which only tells you how folks felt at one given moment in the past (and nothing about how they’ll act). If it is data you seek, we suggest looking at The Conference Board’s Leading Economic Index (LEI), which was up 0.6% m/m in June—the 15th monthly rise in the past 16 months—as no US recession began while LEI was high and rising like it is now. And on the last note, while we caution investors from viewing a September Fed rate hike as inevitable, we agree the economy could handle it—and we’d actually prefer if the Fed finally got on with it already.
|By William Mauldin, The Wall Street Journal , 08/03/2015|
MarketMinder's View: Though the Trans-Pacific Partnership (TPP) is “98% concluded” according to Australia’s trade minister, a major sticking point has soured progress: dairy products. Canada doesn’t want its domestic producers milked by foreign exporters, an argument filled with holes as far as New Zealand is concerned. The disagreement has spilled over to other areas: Japan has suggested New Zealand could be excluded from talks, and the Kiwis, for their part, are annoyed at the Americans for forcing pharmaceutical protections on them while ignoring New Zealand’s dairy interests. Thus, trade officials have ended the current round of negotiations without a clear future meeting set. As disappointing as a lack of a deal may be, this isn’t reason for investors to cry over spilt milk—huge trade deals are notoriously difficult to complete due to all the vested interests at play. If it does become reality, great—markets love more free trade! But if doesn’t, it’s the absence of a positive rather than a real market negative, and the bull won’t cower if the TPP falls through.
Market Wrap-Up, Friday July 31, 2015
Below is a market summary as of market close Friday, 7/31/2015:
Global Equities: MSCI World (+0.3%)
US Equities: S&P 500 (-0.2%)
UK Equities: MSCI UK (+0.4%)
Best Country: Austria (+2.2%)
Worst Country: Singapore (-1.0%)
Best Sector: Utilities (+1.3%)
Worst Sector: Energy (-1.5%)
Bond Yields: 10-year US Treasury yields fell 0.08 percentage point to 2.18%.
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.