Snakes and ladders for the upcoming year
Alex Frew McMillan
Investors have much to ponder. Interest rates remain absurdly low. Hong Kong investors who bought high-yield bonds in record volumes now worry rising interest rates may devalue these assets. Share prices are increasing in Hong Kong and globally, but investors must determine whether or not this is a false rally built on overly expansive central bank policies.
Hong Kong property is another wild card. Prices continue to go up and transaction volumes climb, despite aggressive government cooling measures. Investors have to decide whether interest rate rises, when they do kick in, will finally bring down house prices – confirming government warnings that the market is in bubble territory. Persistent government intervention also means there’s likely a limited upside to an increasingly risky play.
In other words, as we slither into the Year of the Snake, investors face a series of quandaries. It’s a truism to say markets will be volatile in the year ahead. What markets aren’t? And if they slide sideways, does anyone notice? Most folk only pay attention when they’re making or losing money. But then, not making decisions in a market that could turn bullish is as bad as making the wrong ones.
Equity markets have staged a decent rally since the middle of last year, rejuvenating an asset class that many investors had written-off. If you had put money in the stock market in May 2008, you would still be down 10 per cent on your investment, half a decade later.
The MSCI World index rose 12 per cent from November 15, 2012 to the end of January 2013. There is typically a rally at the start of the year, driven by an infusion of retirement funds, but investors have also shown enthusiasm on the stabilising US economy.
“We’re going to see quite a bit of rotation into equities,” Wellian Wiranto, Asia investment strategist at Barclays, says. “They have started the year on a good footing, and we see that continuing.”
Money managers are starting to show interest in that other long-forgotten asset, US property.
US home prices bottomed in January 2012, having fallen 34 per cent from a peak in April 2009, according to the Case-Shiller index of 10 major cities. They were up five per cent for the 11 months through last November, the most recent figures available.
The hardest hit states posted the biggest gains last year, with Phoenix leading the way with prices up 23 per cent for the 12 months through November. Cities in the northeast, which generally fared better during the crisis, lagged behind in 2012. New York saw prices fall 1.2 per cent last year, the only major US city to see housing prices decline.
US stocks still appear cheap to some portfolio managers, despite a rally last year, and the rotation of money from bonds and other yield-generating assets into stocks will likely drive short-term gains.
Longer-term, economic growth prospects still look better in Asia. “On the cyclical side, you might see more interest in developed world equities, but the structural story is still strong in Asia,” Wiranto says.
After three years of massive underperformance, the mainland markets sparked to life at the end of last year. The Shanghai Composite Index jumped 20 per cent in December-January.
Investors were reacting to improved growth outlook for the mainland economy, and seemed reassured by the choice of president-in-waiting Xi Jinping. Xi looks set to follow in Deng Xiaoping’s footsteps, hinting that he will also push for economic reform and freer trade.
China is also likely to accommodate the US by letting its currency resume its gains, after an unusual 2012 in which the yuan only advanced 1.5 per cent instead of the normal four per cent to five per cent range. The currency gain gives any equity advance an added boost.
Government bonds such as US Treasuries are likely to fall out of favour this year if growth returns. Many investment advisers are still not convinced Europe’s debt crisis is over.
“We are looking at a bond crisis next, and global inflation,” Martin Hennecke, associate director at the Tyche Group, says. “I wouldn’t be buying government debt.” In Japan, Prime Minister Shinzo Abe has doubled the country’s inflation target, to two per cent. In practical terms this means Japan’s central bank will be pumping out a lot more cash.
Aggressive money printing is a two-edged sword – it tends to boost equities but weaken the local currency, as has been the case with Abe’s latest monetary stimulus. At time of writing, the Nikkei 225 is the best performing equity index in Asia in 2013, up 8.2 per cent. However, Barclays’ research notes that yen weakness had almost entirely wiped out recent gains in Japanese equities, measured in US dollars, the gain is only 0.5 per cent.
Last year, Indonesia attracted a lot of attention from private equity and real estate investors keen to diversify from a slowing mainland economy. Other parts of Southeast Asia boomed – with the Philippines up 48 per cent and Thailand up 39 per cent.
Hong Kong real estate has proved one of the best investments worldwide since the 2008-09 credit crunch, driven by consistently low interest rates since that crisis unfolded. The bottom of the market for home prices worldwide came in the second quarter of 2009, according to the real estate brokerage Knight Frank. Since then, Hong Kong has led the world, with gains of 53 per cent through the third quarter last year, the most recent figures tracked, ahead of Jakarta, Beijing and London.
There’s little pressure forcing sellers into the market, which means Hong Kong’s heady prices still have considerable support. But most market watchers see limited upside. Alfred Lau, Hong Kong property analyst at BOCOM International, an investment bank, anticipates a five per cent increase in home prices in 2013, thanks to the US Federal Reserve’s pledge to keep interest rates low until at least mid-2015. Knight Frank and Savills have made similar forecasts.
Many prospective buyers have been driven from the market and have chosen to rent. With investment banks laying-off staff, luxury rents fell 6.7 per cent last year, according to Knight Frank.
With the new restrictions causing many buyers to “wait and see”, mass-market rents grew 17.5 per cent in 2012, finally playing catch-up to the high-end market. While buyers can wait, it’s a case of the sooner the better to ink a new lease for tenants.