David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Demographically challenged

    Thanks to a subscriber for this report from Deutsche Bank which may be of interest. Here is a section: 

    A deep dive into demographics suggests a dire outlook for property prices
    Following an in-depth demographic study for Hong Kong, we have turned more negative on housing demand. Taking into account weaker demand and rising supply (we published a FITT report on supply in Sept-16) we have cut our medium-term (2018E-21E) residential price forecasts significantly. We now expect vacancy to surge to 9% (4% now) and ASP to slide 48% by 2026 from current levels. We reiterate our view that developers will be forced to change their business model from land-banking to asset turnover. Hence, we overhaul our valuation methodology from discount-to-NAV to SOTP, using P/E to value development businesses. We downgrade HLD, Kerry and NWD to Hold.

    Several negative demographic trends
    In this report, we identify several notable demographic trends in Hong Kong, with the most significant being: 1) natural population growth has already peaked and is likely to turn negative by around 2027; 2) reduced immigration; 3) the quick shrinkage of the 25-44 years age group to 26% of the total population by 2025, from 38% in 1995 (vs. 29% now); 4) the rise in people aged over 60 years to 30% of the total population, from the current 22%. Hong Kong already has the second-highest over-60 population in Asia, as a percentage of total population, behind Japan.

    Aging population constrains financing, translating into lower affordability
    In our view, housing affordability will be severely affected by an aging population. We believe affordability (debt servicing) is a function of property prices, mortgage rates, loan tenures and income. As the population ages, fewer households will be able stretch their mortgages to the maximum tenure of 30 years. On our new estimates, we expect only 11.5% of total households will be able to afford an average private housing unit by 2019. Moreover, by factoring in upcoming rate hikes, we expect overall affordability to worsen and ASP to decline by 48% over 2017-26 to restore the supply/demand equilibrium.

    A new valuation methodology for property development – P/E approach 
    With improving supply and a bleak outlook for the physical market, we expect land-banking to fade as a business strategy, and we anticipate a growing focus on asset turnover. As a result, we believe a discount-to-NAV valuation methodology will become less relevant in valuing the developers, and we advocate adopting a P/E approach for the development businesses. For the investment properties owned by the HK Property companies, we continue to estimate NAVs based on cap rates. We then apply a discount to the investment property NAV of 34% (the average discount over the past 25 years).


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    Pulses, Indian Beef. Bullish Corn

    Thanks to a subscriber for this report by Ned Schmidt which may be of interest. Here is a section:

    Ten years ago India was not a topic of a lot of interest. This month we find ourselves again talking about India twice, on pulses and beef. And when we look at corn we have some optimism to offer up.

    Pulses are basically dry beans, lentils, and peas. Few of us ever thought about them being grown in North America. U.S. and Canada have become major growers, exporting to India and other nations from the Middle East to India. Bottom graph is of U.S. acreage planted in pulses. While expansion has been irregular, roughly 1.5 million acres have been added in last fifteen years. Canada is a major source of pulses. Roughly 65% of world’s lentils are grown in that nation. Acreage dedicated to these crops is probably approaching 10 million acres. Apparently Canada is an ideal place to grow them, and then send them to India, et al

    India is becoming a major customer for world’s food system. Second, world will grow what customers want. Farmers are looking to produce alternative crops in search for profits. The “corn vs. soybean” farmer, while essential, may increasingly become “outdated”.

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    Concerned about the Paris Agreement? There's still hope through girls' education

    This article by Rebecca Winthrop and Christina Kwauk for the Brookings Institute may be of interest to subscribers. Here is a section:

    The good news is that the most effective intervention is not even in the Paris Agreement. Empowering girls and women through a combination of education and family planning is the number one thing the world can do to address climate change, ahead of switching to solar energy, wind energy, or a plant-rich diet. Investing in both girls’ education around the globe and enabling women access to contraception and reproductive healthcare would result in 120 gigatons of carbon reduced by 2050, a staggering amount compared to the 90 gigatons that could be reduced by better management of harmful chemical refrigerants like chlorofluorocarbons (CFCs).

    Demographers, global development specialists, and education advocates have long known about the connection between girls’ and women’s empowerment and smaller, more sustainable families. Research suggests that the difference in family size for a woman with 0 years of schooling compared to a woman with 12 years of schooling is about four to five children. And several studies have projected slower population growth if all girls around the world receive a secondary school education—as much as two billion fewer people on the planet for 2050 than if current fertility rates persist, and over five billion fewer people by 2100. Indeed, reaching a sustainable population growth rate could be realized even more quickly if the 225 million women around the world who want to avoid pregnancy but do not have access to contraception or control over their reproductive lives were given access to safe and voluntary family planning. The majority of these women live in the world’s 69 poorest countries, and it’s no coincidence that many of these countries are where girls have the hardest time going to school.


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    Email of the day 1

    On Theresa May’s disappointing campaign:

    Bullying, yes, and the British always tend to support underdogs. But the Tory campaign has allowed the debate to swing away from Brexit onto domestic, where Labour is generous and Tories realistic. Generosity is more attractive than reality. Her U Turn on Social Care -why introduce a radical domestic change mid-term when you are already incumbent and don't need to? - had many good points but she allowed Labour to characterize it as austerity. Overall, the Tory campaign has lacked bite and energy, allowing opponents to pitch it as arrogant and unnecessarily austere. A Trump factor - disenchantment with the political class - also works against the Tories and in favour of outsider Corbyn and the innumerate amateurism of his acolytes.

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    The Weekly View: Watching a Baton Pass - Eurozone Momentum

    My thanks to Rod Smyth, Chief Investment Strategist at RiverFront for his excellent publication.  Here is the opening:

    Our 2017 Outlook, published in January, was called Passing the Baton. We anticipated a series of changing economic and market drivers – baton passes – across the global economy.  We felt investors had focused so much on political risk in the Eurozone during 2016 that the potential persistence of the economic and earnings recovery was underappreciated. Last week, the monthly surveys from companies around the world combined with the monthly employment numbers in the US suggest two things to us:

    1. Growth momentum outside the US, especially in the Eurozone, is slightly stronger.
    2. Absent the anticipated stimulus (tax cuts, infrastructure spending etc.), employment growth is slowing somewhat, as is car buying. That said, the US surveys are positive, as is employment growth. We expect growth to continue and await greater clarity from Washington.

    In analysing the employment numbers, we take great care to recognize that monthly information on the labor market is volatile and seek to smooth it out. The chart below shows the two major US surveys with each of them smoothed out into a 3 month, 6 month and 12 month average. Looking at the last 6 years, the 12 month average has been pretty consistent at around 200,000 new jobs per month for both surveys. The payroll survey is from companies and is more widely publish, but it is the household survey that the Labor Department uses to calculate the unemployment rate, currently at the historically low level of 4.3% (see our chart on page 2).   

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    Excellent summary of the UK election campaign from a reader of The Telegraph

    This was published on 3rd June:

    SIR – A few weeks ago the Tories were in a commanding position, and now there is a fair possibility that we will be governed by a coalition of a union-led, economically illiterate, anti-Semitic Labour Party, a rabidly anti-British SNP and the ineffectual Lib Dems.

    This happened because people believe we are led by a difficult woman who is not a team player, doesn’t listen to advice, is prone to U-turns and performs badly on television.

    Peter Bullock

    Chalfont St Giles, Buckinghamshire

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    Email of the day 2

    More on the UK election: 

    Hiya David

    The prospect of Corbyn terrifies me, truly. I agree, we will be taken back to a 70’s style nightmare. Perhaps not cerebral enough for your website but I think the man is the spitting image of Davros. If you are a Doctor Who fan you may remember him from the 70’s as well.

    But for what it’s worth I think the Conservatives will win, comfortably. This site does give me some hope. It seems such a long time ago now but I was certain Cameron would win in 2015, and that there would be a Brexit vote last year. So hopefully, not 3rd time unlucky.

    We shall see!

    All the very best

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    Buyers Scooping 50-Cent VIX Calls Again After Stock Tumult Ebbs

    This article by Gregory Calderone for Bloomberg may be of interest to subscribers. Here is a section:

    A trader purchased a block of almost 75,000 July $18 calls on the CBOE Volatility Index on Monday for 50 cents apiece, echoing buying previously associated with a personage dubbed “50 Cent.” That followed similar trading on Friday, when 100,000 July $19 calls were bought, also at a price in the neighborhood of half a dollar per contract.

    Investors like 50 Cent are choosing to hedge as the S&P 500 Index reaches fresh records despite concerns ranging from politics to Federal Reserve tightening. Traders have been using VIX contracts like never before this year, with daily call volume outpacing puts by almost threefold on average. The number of options outstanding protecting against a resurgence of volatility is now at its highest level since the week before Donald Trump’s election, relative to bets for quieter days ahead.

    50 Cent, a buyer or buyers of near-month VIX calls, is hardly the only trader taking a view on future stock swings.

    With the index grinding lower, a more profitable trade this year has been to sell volatility, not buy it. Even the 46 percent VIX surge of May 17 was quickly erased when the gauge fell for seven straight days.

    The blocks of July 18 and 19 calls of the last two sessions represented by far the highest single-day volume in either strike’s history, though they weren’t enough to push overall calls past historical averages.

    As was the case before, the trading was in options that would require a lot of equity turbulence to be exercised. At 18, the lower of the two has a strike of more than 40 percent above the level of the monthly July VIX futures. Even the 373-point Dow Jones Industrial Average rout in mid-May wasn’t enough to push the volatility index above 16.


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    Top Risks 2017: The Geopolitical Recession

    Thanks to a subscriber for this report by Ian Bremmer and Cliff Kupchan for Eurasia Group may be of interest. Here is a section:

    It’s been six years since we first wrote about the coming G-Zero world—a world with no global leader. The underlying shifts in the geopolitical environment have been clear: a US with less interest in assuming leadership responsibilities; US allies, particularly in Europe, that are weaker and looking to hedge bets on US intentions; and two frenemies, Russia and China, seeking to assert themselves as (limited) alternatives to the US—Russia primarily on the security front in its extended backyard, and China primarily on the economic front regionally, and, increasingly, globally.

    These trends have accelerated with the populist revolt against “globalism”—first in the Middle East, then in Europe, and now in the US. Through 2016, you could see the G-Zero picking up speed on multiple fronts: the further deterioration of the transatlantic alliance with Brexit and the “no” vote on the Italy referendum; the end of America’s Asia pivot with the collapse of the Trans-Pacific Partnership and the Philippine president announcing a break with the US; the Russian victory in Syria after backing President Bashar al Assad through nearly six years of war.

    But with the shock election of Donald Trump as president of the US, the G-Zero world is now fully upon us. The triumph of “America first” as the primary driver of foreign policy in the world’s only superpower marks a break with decades of US exceptionalism and belief in the indispensability of US leadership, however flawed and uneven. With it ends a 70-year geopolitical era of Pax Americana, one in which globalization and Americanization were tightly linked, and American hegemony in security, trade, and promotion of values provided guardrails for the global economy.
    In 2017 we enter a period of geopolitical recession.

    This year marks the most volatile political risk environment in the postwar period, at least as important to global markets as the economic recession of 2008. It needn’t develop into a geopolitical depression that triggers major interstate military conflict and/or the breakdown of major central government institutions. But such an outcome is now thinkable, a tail risk from the weakening of international security and economic architecture and deepening mistrust among the world’s most powerful governments. 


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