Posts tagged ‘property’
Stock markets are enjoying a bit of a bounce today, and oil futures are up. Risk assets are showing weak signs of an effort to get back up onto their knees. Of course the Chinese stock market opens now after the New Year holiday and may fall 7% in twenty minutes again on Sunday night. And at the end of the week David Cameron will emerge from a European summit, proudly clutching some kind of permission slip and ushering in the Brexit referendum. But today we can enjoy some relief from the carnage. However . . .
Worries have surfaced over the London property market this week. Only this morning, Bloomberg reported that central London has “fallen into the grip of the bears”. One can quibble with some of the detail: falls in REIT shares are not the same as falls in the price of property, for instance (which is why the sector is currently on a price / book ratio of 0.85x). Still, their data shows a fall in buying interest from sovereign wealth funds of £2bn in the six months to November. As one analyst put it: “London is becoming a victim of its own success as the petro-dollar trade unwinds, with SWFs selling assets.” Falling stock prices may not have much of an impact, then, but the falling oil price may be something else.
On the other hand, one headline out a week earlier stated that the prime central London residential market will benefit from cheap oil, the reason being that anxious sheikhs will see it as a safe haven. Or if you don’t buy that argument, what about demand from China, with investors and business people from the Far East just as keen on London as the Americans, Arabs and Russians before them? Admittedly both of these lines come from estate agents – but then again, who would know more about the market?
Of course London is only part of the UK market as a whole, residential is not the same as commercial – and even there the Bloomberg point about a £2bn reduction still apparently left incremental SWF demand of £16bn to play with. So even if those making a bull case for property are talking their own books up, we are perhaps some distance from the end of the world.
This will come as a relief to all those in Britain (almost everyone) who sees their own home as an inviolably valuable asset. For homeowners it is not a question of markets: there is a Property Ladder. And it will continue climbing up to Heaven long, long after we have got there ourselves.
Not as many people who live here do own homes as they used to, of course. Rather than being carried up the Property Ladder, they are pouring their money down what is seen as the Rental Drain. According to survey data from National Statistics the proportion of UK residents who own their homes has fallen to its lowest level for at least a quarter of a century. The proportion of those in social housing has dropped over a much longer period, standing at about the same level it was in the 1950s. Private rentals make up the difference. For obvious reasons this change has a demographic distribution, with just under half of those aged between 25 and 34 now renting (without counting those still living in the family home).
There are all sorts of reasons for these changes but one of them is indisputable: affordability. Again, there are various underlying factors at work here, but using a model of the strain put on average earnings by a hypothetical average vanilla mortgage arrangement, affordability fell below its 40-year average last year at a time when interest rates have remained near zero. In the immediate aftermath of the Great Recession, UK housing looked cheap on this measure. Since then, rates have not moved, and average earnings have only increased by about 1.6% per year. The movement from cheap to just shy of fair has come about almost entirely as a result of the appreciation in prices.
Worries about the oil price aside, then, we might raise a bit of an eyebrow about the vulnerability of UK homeowners – or at least, UK mortgagors – to any increase in interest rates as and when it comes. In many cases such an increase will be affordable: measures like these speak only of the affordability to those maxing out the credit card today. On the other hand, mortgage approvals are running at the rate of over 70,000 per month at the moment – low by historic standards (affordability again) but still high enough to cause problems for large numbers of those caught out when the music stops.
But there are reasons to be fearful where the conditions exist for painful disruption to markets which have become complacent about risk. Whatever the timing, and whatever the scale of the eventual damage, there are cracks showing which suggest that the UK property market might be in just such a situation.
Well so much for 2015. It was a curious year for the major asset classes and a frustrating one for many investors, including those in the UK. Still, now it has passed we can look at the numbers, identify the winners and losers and remind ourselves that the only reliably immovable feature of the financial landscape is uncertainty.
Starting with UK equity an initially record-breaking year unwound to deliver a disappointing total return of -1% to the FTSE 100 Index. It was a very different story for the mid- and small-cap indices, however, which are less exposed to energy price and currency effects and posted numbers of +11.4% and +9.5% respectively.
On the fixed income front it was a tough year for gilts. Markets which might have been expected to benefit from “risk off” nervousness struggled in the face of the anticipated gradual unwinding of emergency monetary conditions both here and across the Atlantic. The Bank of America Merrill Lynch conventional gilt index managed to return only +0.5% last year with the index-linked index actually losing 1.2%.
Corporate bonds did a little better, with the BoA ML sterling non-gilt benchmark delivering +0.7%. The sterling high yield bond market is tiny (with a face value of £48bn, about the size of Diageo’s market cap), but for what it is worth returned a creditable 5.4%. High yield returns in Europe (+0.8%) and the US (-4.6%) give a more representative idea of what might have been secured by UK-based investors in this asset class, however, and the combined $1.7trn market here was dented by the collapse of borrowers in the US energy sector.
Away from smaller-cap equity and high yield the really bright spot was the property market. Commercial property continued its strong recovery, with price growth underpinning a 19.1% return to the IPD All Property Index (over the year to November, the most recent month for which data is available). And though the residential market lost a little heat last year it was up by 9% on the year to November in price terms using the smoothed HBOS house price series.
Cash rates hardly moved in 2015 as one would expect with the Bank rate frozen at 0.5%: the NS&I Income Bond rate stood at 1.25% with term fixes from the banking sector available a few bp higher. Key exchange rate moves were (as one would also expect) rather more exciting: the pound fell by 5.4% against the dollar, 5.0% against the yen and 4.9% against the Swiss franc while managing to put on 5.4% against the euro.
The most significant market move of all came from commodities with the price of oil down by more than 31% in sterling terms over the course of the year. Gold also fell, the GBP price losing 5.3%.
Finally a brief look at some of the other key international markets (all in local currency terms).
- It was a disappointing year for US equity with the S&P 500 returning only 1.4%.
- Europe did better, paying investors 7.4%, while Japan was best of the major markets with a total return of just over 12%.
- Major government bond markets did very slightly better than gilts with the BoA ML US Treasury Index returning 0.8% and the Euro Government Index 1.6%.
- More interestingly, the top performers in the eurozone were the weaker peripheral countries with the Italy index returning nearly 5% and Greece – recovering from price depression into the start of the year – delivering over 20%.
- During the year Greek politics were usurped by the Chinese stock market as the financial world’s bête noire. So it is interesting that the Shanghai Composite Index, despite all its intra-year turmoil, posted a return of +11.2% across 2015 as a whole.
It was a year of turbulence and surprises, though one or two of these numbers did turn out roughly as the consensus had expected at the start of the year. How the consensus, along with the rest of us, will do during 2016 we will all discover in due course …
Economically speaking there has been little drama or excitement in the UK over recent months. While markets agonized over Greece, and then China, and subsequently the Fed, the British economy quietly kept on going. There have been no growth surprises in either direction; no change to the Bank of England’s guidance or rhetoric on interest rates; no unexpected outcomes in the labour market, or price indices, or activity indicators. The PMI survey for September showed a bit of weakening in output. And Mark Carney did have some diverting things to say about topics other than monetary policy (climate change for instance). But all in all, it has been an uneventful time.
Nonetheless the UK markets are of key importance to British investors and do not always reflect goings on in the economy, to say the least. So while the economy might not invite too much scrutiny just at the moment, here is a summary of conditions across the major UK asset classes.
Starting with property, the residential market rally that took off in 2013-14 continued into this year but has abated somewhat. Government data showed a 5% increase in house prices in the twelve months to August, down from a 12% annual rate in the early autumn of last year. Valuations are mixed: the simple average earnings to average house price measure suggests the market is red hot but on this measure that has been true since 2004. Using a measure of mortgage affordability (which takes account of interest rates) the market is priced fairly: the ratio of average mortgage payments to average earnings is almost exactly in line with the average since 1976.
The commercial property market has been having a jollier time of things, with the Investment Property Databank All Property total return index up 15% over the twelve months to September. Again, the valuation picture is mixed. Rental yields have fallen sharply over the last couple of years and are about as low as they were at the peak of the late 1980s boom (though still a little way off the lows seen before the Great Recession). On the other hand, the rate of capital growth has not been as aggressive as in previous rallies and there is some distance before the market surpasses its 2007 peak.
Staying at the riskier end of the spectrum the equity market has been picking up nicely in recent days. The FTSE 100 has risen by 5% so far this month and is now 8% above the low it marked towards the end of August – though remains 10% below the record set back in April. There has been pressure on earnings from currency and commodity effects this year so the improvement in valuation since then has actually been rather muted: the forward p/e ratio has risen from 14x to 16x, which looks toppy against a ten year average of 12x. At the same time, however, the dividend yield has risen from 3.5% at the end of last year to 3.9% today (the ten year average is 3.6%).
Talking of yields, the gilt market has barely shifted from where it began the year. All the key maturities – two year, five year, ten year, thirty year – as well as the ultra longs are within 10bp of where they ended 2014. There is one exception: the ultra long end of the index-linked market has rallied, with the yield on the 0 3/8% 2068 linker down 16bp to an uncompelling -0.8% in real terms. The ten year conventional gilt yield stands at 1.8%.
Corporate bonds have similarly had a dull time of things, at least in the investment grade arena where widening spreads have seen total returns of about 0.5% according to the Bank of America Merrill Lynch family of indices. High yield has done better: spreads are about where they were at the start of 2015 so there has been relatively little capital impact on income return (the total return on the sterling high yield index stands at 4% for the year to date). In valuation terms credit spreads are much higher than they were in the years preceding the 2007 crunch but not very compelling against average levels given the scale of the collapse at that time. Using the Markit iTraxx Europe index as a benchmark the price of investment grade credit is just over 80bp today, up from a pre-crisis low of 20bp but somewhat below a ten year average of 90bp.
There is nothing much to say about cash with base rate stuck at 0.5% for the last six and a half years, though the worst performing assets of all are to be found in the commodity space. The near Brent crude oil future has rallied from the new bottom it reached in August (by some 14% in fact), but is still worth less than half what it was before the crash last year. The economic and market consensus is for very limited improvement over the coming months and with supply still materially stronger than demand there seems little reason to argue with this. There would also appear to be the will in some important quarters for oil to stay cheap: Saudi Arabia alone increased daily production by just over one million barrels during the first seven months of this year.
Precious metals have had a better time of things too lately and both gold and silver are trading very near the levels at which they began the year. Still, gold at $1183 an ounce remains expensive relative to inflation-adjusted 30 and 40 year averages of $793 and $825, even though that price is almost 40% below the $1900 reached at the peak of the bubble.
At this point we have departed from strictly British assets of course but that, at least, is all the key bases covered!
It has not been the easiest of years for UK investors and readers will have noted that this blog sees continued volatility ahead. But there are always opportunities amid uncertainty. Time will tell if we are able to find them out.
With 2014 now a few days old it is time to have a look at what markets delivered during 2013. (All returns data is given in GBP terms.)
The risk-on pattern established from the summer of 2012 continued, with the MSCI World Index returning exactly 25%. Of this, 23% had been reached by the time of the Japanese market crash towards the end of May. Risk-on was highly selective, however. By the same point, the MSCI Emerging Markets Index had lagged on concerns over growth in developed markets, delivering only 8.1%. EM took a particularly hard battering in the weeks that followed. With recovery into year end only partial, returns for the whole period were modestly negative and trailed the World Index by a staggering 29.3%.
Variety within these numbers was enormous. While markets in Nigeria, Bulgaria and Argentina all returned around 40-45%, stock indices in Brazil, Turkey and Peru lost around 30%. Among developed markets the US did best, delivering 29.7%. The Nikkei 225 and Euro Stoxx 50 were close behind, returning 26.5% and 25.8% respectively; and the FTSE 100 turned in a most respectable 19.2%.
Major government markets generally had a poor year. The 10-year gilt yield rose by 1.2% to close at 3% – exactly the same story as for the 10-year US treasury. Japan did better, closing broadly flat at 0.7%, and Germany wound up somewhere in between, with the 10-year bund yield creeping up from 1.3% to 1.9%.
In returns terms the top performers came from the eurozone periphery, with the Greek market delivering an extremely un-bondlike 40%. Spanish and Irish markets returned 14%, paltry by comparison, but again, rather extraordinary for government markets. Allowing for currency weakness the poorest performers were South Africa, Australia and Japan, which lost 18-20%; in local currency terms, however, it was the big developed markets which fared worst.
Credit generally had a storming time. The iTraxx main index of European CDS prices registered a fall in investment-grade spreads from 117bp to 70bp, only 5bp above the post-crunch low seen in January 2010. The crossover index, a measure of high yield risk pricing, saw spreads fall by almost 2%, smashing through similar lows to reach 282bp, a level not witnessed since late 2007. The exception was emerging market sovereign debt. Here, the BofA / Merrill Lynch index of hard-currency-denominated bonds from EM issuers saw spreads rise from 248bp to 297bp with the weakness concentrated in the first half of the year.
After a shaky start the pound had a respectable year, closing 1.7% higher on a trade-weighted basis. It was little changed against the dollar and the euro (about 2% stronger and 2% weaker respectively), though put on 19% against the yen. In fact, only a handful of what Bloomberg calls the “expanded majors” beat it, with the top performer in that basket being the Israeli shekel, which topped sterling by 5.5%. The Chinese yuan, subject as it is to a policy of gradual, managed revaluation, gained 1% against the GBP, and a couple of the emerging European countries squeaked a little higher too.
At the bottom of the pile the action was much more dramatic: emerging market currencies from South America to the Far East tumbled by as much as 20+%.
Appearing as they now do on various currency screens it seems appropriate to link this section with the last one by starting out with a look at gold and silver. And what an unpleasant sight meets the eyes: gold dropped by 29% against the pound and silver by 37%. In fact, in its “home” currency of US dollars, gold saw a twelve-year bull run end in 2013 and its biggest yearly percentage fall since 1981. (The latter point also goes for silver.)
It was a quiet year for oil, with the near Brent future flat over a year which saw price volatility reach some key lows. More interesting was the gas market, with the NYMEX future rising by 26%, its second consecutive annual increase.
Less interesting from an investment point of view but of some economic interest, the Bloomberg index of industrial metals prices dropped by 8% while the Baltic Dry Index of freight more than tripled (+226%).
Last, but for UK investors especially, far from least: bricks and mortar. The Nationwide index of house prices for December was out this morning and showed an increase of 8.4% on the year, the highest rate since June 2010.
Commercial property has had a duller time. IPD data for December is not yet available but the trend in recent months has been positive and we are on course for an increase in capital value across all sectors (retail, office and industrial) of about 2.5% for the year. Interestingly, this index remains 36% below its 2007 peak, and lower even than the previous high reached in 1989.
In Conclusion …
2013 presented investors with a decidedly mixed bag of results. Past performance is of course no guide to future returns and it would be otiose to extrapolate from or over-interpret them. What is clear, however, is that trends in some markets have been much more pronounced than others; and although much market behaviour has been logically and intuitively correlative, in some cases these trends have diverged to the point of incompatibility. Should they reconverge in 2014 it could be a good year for investors – if we manage to find ourselves on the right side of the reconvergence …
UK activity indicators continue to disappoint. At -0.3% for the final quarter of last year, real GDP is estimated by the NIESR to have risen by only 0.1% in Q1. The trade figures suggest that British exporters have yet to benefit from the weakness in sterling. Only this morning, new data suggested that the recovery in construction is proving glacial. And yet there has been one important sign of brightness lately.
When Norman Lamont said he could see the green shoots of recovery in 1991 he was derided. He was absolutely right, technically speaking: the British recession ended in the last quarter of that year. But it didn’t feel like that. It was in 1991 that repossessions peaked, hitting a total of about 75,000 for the year.
The experience of our residential property market this time round has not been quite so miserable. Repossessions reached “only” 48,000 in 2009, and had already come back down to under 34,000 last year. At the same time, however, data on mortgage approvals, net lending secured on dwellings and housing equity withdrawal show the property market still stuck firmly in the post-recession trough.
So it feels a little courageous to observe that several key indicators for house prices have risen recently. The ONS series, Nationwide index and Halifax index have all gathered pace in recent months. This chimes with a bounce in the RICS survey for England and Wales which shows an even balance between those reporting higher and lower prices (the average for the last 5 years has been -25.6%). Most surprising of all is the recent performance of housebuilders on the stock market: shares in Persimmon, Taylor Wimpey and Barratt have returned 74%, 82% and 108% over the last 12 months as against 18% for the All Share index.
The importance of the housing market to the UK economy is hard to overstate. The “cult of equity” which occasionally troubles commentators in financial circles is an irrelevant sideshow here to the Cult of Property which has variously dominated everything from fiscal policy to the banking system to parliamentary expenses claims to British TV schedules over the years. An upturn in prices and activity would give consumer confidence a badly needed boost.
This is not to advocate a return to the days of irresponsible borrowing and the deposit-free mortgages which the Chancellor seems to think it a good idea to reintroduce. But it would be nice – half a decade on – to see the market put on, say, the 3.5% which on ONS figures would see it rediscover its pre-recession peak.
This blog has long argued that the UK is lucky to have been considered a safe haven. On this side of the Atlantic it remains harder to show optimism over the economy’s near-term prospects. But that doesn’t mean we should ignore green shoots when we see them. A stronger residential property market might just help us get back towards trend levels of growth before 2016.
Goodbye – all right, perhaps a little prematurely, but goodbye anyway – to you, 2012. While you brought your own mix of shocks and surprises, at least financial markets were less excitable as a rule than they had learned to become over the course of your immediate predecessors. Let’s take a look at some of your highlights …
Fears over Eurogeddon and global slump had their share of the limelight over the year and produced some familiar episodes of funk. As in prior years, however, the sky did not fall in and almost all markets had a good 2012 overall. In price terms, the FTSE 100 is 6.6% up YTD, the S&P 500 up 8.7%, the Euro Stoxx 50 up 11.6% and the Nikkei 225 up 5.9% (all on a sterling basis). Currency made some big differences: in yen for instance, the Nikkei is 22.9% up on the year.
It wasn’t all gung-ho risk repricing, however; there was still too much chaos around for that. In Europe, for instance, safe-as-houses Germany comfortably outshone the wider eurozone with a 26.6% GBP price return to the DAX, while Milan couldn’t match the large cap index with a return of just over 6%. Then again, Germany wasn’t the zone’s top performer .. Step forward new entrant Estonia, with a 35.6% rise. Amazingly, the Athens Stock Exchange is up almost 31% too.
At a whole-world level too, the numbers show there was more going on than simple bullishness, or shared damage repair from the crash of 2011. In GBP terms, the MSCI World Index of developed market equity stands 12.3% above where it began the year, while the equivalent Emerging Market index has moved practically in lock step (+13.7%) – i.e. has still underperformed since H1 last year.
Fixed income markets offered greater clarity and greater confusion at the same time. Greater clarity, because the behaviour of government and credit markets followed a similar pattern of “risk on”: the spreads of weaker eurozone government bond yields over those of Germany came in as a rule, spreads on emerging market debt were also tighter, and credit spreads have tightened significantly for both investment grade and high yield corporate bonds.
At the same time, yields on “safe haven” governments drifted lower over the year as a whole; despite the recovery of sentiment, 10-year German debt yields 0.5% less than it did a year ago. This could be explained by relief over slack growth (leading to contained inflation and continued low policy rates) – but that is hardly consistent with strong returns to equity, where slower economic growth means lower growth in company earnings. Similarly, equity market revaluation arising from stronger confidence over tail risks should have been expected to go hand in hand with a sell-off in safe haven assets, which didn’t happen.
The commodity story is similarly varied. Oil trickled higher, with the Brent crude future about 3% above where it began the year. Or perhaps it fell – the American WTI index is lower by almost twice as much. So the gap between oil futures contracts in London and New York has widened to $20 per barrel; before 2011 it was reasonably firmly pinned to an average of zero. This is attributable to the relative pace of shale development in the US and European economies.
In metals, gold continued its strong run overall across a year in which it failed to beat its 2011 high – it’s about 6% up YTD. Amazingly, the gold price (in nominal dollar terms) has now not fallen over any calendar year since 2000. Silver has done a little better (+7.9%), though of course it’s had a rougher ride over the longer term and is much further below its 2011 top. For those interested, the ratio between the two prices (gold:silver) is roughly in line with the 40-year average now at 55.3x.
UK commercial property across all types and locations (as measured by the IPD index) is heading to be about 4% lower in terms of capital value over the 2012. Offices did better than industrial buildings, with retail property coming in last, though there has not been much to choose between them at the nationwide aggregate level. Overall, commercial property prices are about where they stood at the end of 2008 (following the lion’s share of the post-boom shock).
Land registry data on the residential property market is published with a longer than usual delay, but currently available figures suggest anything from flat growth overall to a modest sub-2% rise. Nationally, housing is still more affordable – or at least, cheaper in price terms – on average than it was at the 2007-8 market peak. Interestingly, the national figures conceal a safe haven effect which is visible at the more local level. The government data shows that prices in London have risen at about 4%, having held steadily above the peak since the second half of last year. While there is no official data on the subject the inferior reservoirs of anecdote and common sense suggest that the preference of international investment flows for the capital are behind this.
The year saw very little change here. OK, so the ECB slashed its main refinancing rate from 1.00% to 0.75%, but the other big developed world banks had little scope beyond sticking to their existing near-zero policies (0.5%, 0.25% and 0.1% in the UK, US and Japan respectively).
Let’s look at the negatives first:
- In a low-growth year, equity market recovery has pushed earnings valuations out of cheap territory. Should forecast increases fail to materialise – for whatever reason – this should make those markets more vulnerable to a setback.
- Stronger safe-haven bond markets could reflect a greater general level of comfort with the concept of government debt – and respect for the willingness of central banks to increase their influence over longer-term interest rates. But they do conflict with stock market optimism and it’s impossible to say with certainty which market is right.
And to end with the positive notes:
- During 2012 markets flirted with the idea of renewed global catastrophe, which made a pleasant change from assuming it was absolutely, definitely just around the corner.
- If this increase in confidence persists – in the bond markets most importantly – it will encourage confidence in the real economy to continue to trickle back as well.
Perhaps the most positive sign for those of us who try to behave like the fabled Rational Investor of the financial textbooks was this: differences in price movements within asset classes reflected discernible variations in fundamental behaviour. It was logical for Italian bond spreads to narrow by twice as much as those of Spain. At the same time, it was reasonable for Italian stocks to underperform German ones.
There was much that is difficult to explain, and the broad outlook for the world remains enigmatic. But 2012 gave us a little more stability in the financial world, a little more sensitivity to fundamentals and valuations and altogether less downright hysteria. If that background for 2013 stays in place then investors could well find themselves looking back on the past twelve months with some gratitude.
Among the burdens weighing on markets this month has been renewed concern over the prospect of a slowdown in China. In particular, the country’s growth target was revised down to 7.5%, data on exports and foreign investment were weaker than expected, and activity surveys have been a mixed bag. And there are many who await a catastrophic collapse of the property market following years of eye-watering growth.
Some of these concerns are more valid than others. Take the official growth target, for instance. This has been running at 8% for the past 8 years, during which time the pace of expansion actually averaged over 10%.
The property market is scarier. There have been signs of a slowdown in the official data for some time, which anecdote suggests could be far worse. (The reliability of Chinese statistics is a constant cause for concern.) But even here, the slowdown comes as a result of government action – action which at the level of monetary policy took the form of aggressive increases to the reserves required to be held against lending by the country’s banks. The credit crunch was so devastating in its effects partly because it took western policymakers by surprise. The same cannot be said of China.
Furthermore, an important side effect of hiking the required level of capital reserves in the banking system (currently 20.5%) is that it ought to prove more resilient in the face of write downs, limiting the impact of any property bubble on the wider economy. And taking a step further back, even if any banks do need bailing out this won’t be a problem for a nation with no government debt to speak of and over $3,200bn in reserves.
It is the foreign investment and export data, however, that reminds us just how remarkable the Chinese experience has been in recent years. While FDI last month was 0.9% lower than a year earlier, it contracted at rates of over 36% at the nadir of the credit crunch. At the same time, exports – rising at a “disappointing” 18% at present – fell by over a quarter. And amidst the wholesale collapse of its foreign markets, real growth in China’s GDP bottomed at +6.2%.
This was nothing short of incredible. It proved that China’s expansion had organic momentum, something which had disastrously eluded the “Asian Tigers” a decade earlier for example. And while China is the world’s second largest economy in terms of dollar output, if we divide that output by the country’s huge population we find that it remains quite poor in per capita terms – about 90th in the world rather than second, alongside the poorer parts of eastern Europe or the Caribbean. Growth in domestic demand should have a lot further to run.
This “year of the dragon” has got off to a rocky start. The bear case on China – and Chinese real estate in particular – has some merit. But the risks are known and are playing out against a constructive background. If the country could weather the international events of 2007-9 in the way that it did, markets may well be underestimating its resilience to a home-grown shock.