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

    China cracks down on foreign currency transfers for property deals

    This article by Michael Smith for The Australian Financial Review may be of interest to subscribers. Here is a section:

    The decision to publish the cases, which involved millions of dollars in fines, is seen as a warning that the government is less willing to tolerate what is considered a grey area in the country's capital control rules. Liu Xuezhi, an economist at China's Bank of Communications, said this showed Beijing's crackdown on offshore commercial deals was being extended to individual investors.

    "The government regulation on foreign currency is becoming more thorough. They are extending supervision from corporates to individuals," he told The Australian Financial Review.

    "The tight control on foreign capital will be maintained for the next one or two years. This would bring an impact to the Chinese investors who are planning to buy properties overseas, including Australia."

    Zong Liang, a senior researcher with the Bank of China, said he expected the move to more closely monitor transactions would stay in place for the next five years and weaken the appetite for Chinese investors in Australian property.

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    Email of the day on the merits of buy-to-let

    Regarding your piece yesterday on balancing one's portfolio and finding safety, I would add a somewhat personal view. As I am in the finance industry myself, the restrictions on investing in listed securities is quite a burden and I'm finding traditional buy-to-let investing more and more compelling. It should work reasonably well also as an inflation hedge, since the rent can be adjusted with inflation and the real value of the principal generally moves with inflation. Of course this equation depends on things like whether your area has population growth and the yield curve of your respective currency, but at least in EUR the FIXED financing costs are so ridiculously low that it is hard to see how one can lose money on a say 60-70 percent financing over a 15-20 year horizon. A practical issue is that there is a (modest) amount of work when finding a new tenant, for example. For me, this also provides a nice additional retirement income, since the tenants have paid off the bank loans roughly at the same time as I'm about to leave the workforce, so that the rents become cash flow to me. Just a personal thought here, it may not be the best choice for everyone.

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    Email of the day on the platinum/gold ratio:

    Email of the day on balancing a portfolio

    Yesterday’s article in The Wall Street Journal raises an interesting issue that may be interesting for discussion (see attached and the link - https://www.wsj.com/articles/octobers-market-rout-leaves-investors-with-no-place-to-hide-1540978259 ).

    “Adding to the stock market’s anxieties has been a rare simultaneous drop in bond prices that has pushed yields near their highest levels in years. The dual breakdown in stock and bond prices has upended investors’ traditional safety tool kit of buying Treasurys during periods of volatility, leaving many with losses.”

    Traditional investment portfolios of 60% equities and 40% bonds lost more than 3% in October and are down 1.2% this year, on pace for a rare annual loss that was last seen in 2008, as well as during volatile periods in 1990, 2001 and 2002, said Luca Paolini, chief strategist at Pictet Asset Management, which manages $191 billion. Even investors who are heavier on fixed income would still be in the red, with allocations of 75% bonds and 25% equities falling more than 2% this month to drag their performance down 1.1% for the year… Declines in bond prices, meanwhile, have exacerbated investors’ pain. Annualized losses among U.S. Treasurys and investment-grade bonds are at 9.7% and 4%, respectively, the third-steepest declines since 1970, according to a recent Bank of America Merrill Lynch report.”

    Portfolio with 60% equities and 40% bonds allocation has been the most traditional advice for individual investors for decades. But I just thought, those were decades of the secular, almost 40-year bull trend in the bond market. If, as you and David often say, we are now witnessing the beginning of the secular bear market in bonds, then this 60-40 allocation represents troubles ahead. Bonds will probably stop being the same safe haven they were in the past. Yes, they will continue to provide some stability to a portfolio in a sense that they won’t fall 10% as equities but instead of rising in times of turmoil, they will also slump.

    If this is the case, how allocation can be changed and where investors will look for safe heavens?

    As always, it would be interesting to know your view.

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    Dollar Hits Wall at 17-Month High, Set for Worst Day Since July

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

    “We’re thinking more broadly that this is another peak in the dollar, and we’re going to see it drifting lower in the next year,” Mark McCormick, head of North America FX strategy at TD, said in an interview. “The market has priced in an excessive amount of global stress.”

    The S&P 500’s nearly 7 percent drop in October likely fueled rebalancing flows back into U.S. stocks, which are now reversing, McCormick said.

    But yuan strength is also a factor, he said, after China’s leadership signaled more stimulus measures are being planned to shield the economy from repercussions of U.S. trade protectionism. And Brexit developments may lift the euro and the pound, which are undervalued relative to their cyclical drivers, TD says. The dollar, meanwhile, is more than 3 percent rich to the bank’s global factor model.
     

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    Equity and Quant Hedge Funds Hit Hardest by Stock Market Rout

    This article by Saijel Kishan and Suzy Waite for Bloomberg may be of interest to subscribers. Here is a section:

    The selloff underscores the perils that funds face when they pile into the same stocks. Equity funds suffered after the top 10 stocks they’re most “crowded” in underperformed the S&P 500 Index by almost 3 percent on Oct. 29, the worst day since 2010, Morgan Stanley said. In addition, the top 10 stocks that funds bet against outperformed the index by more than 1 percent.

    Funds that use computer-driven models to follow big market trends were whiplashed as price volatility spiked. Among the casualties: Leda Braga’s BlueTrend hedge fund, GAM Holding AG’s Cantab unit and Man Group Plc’s AHL unit. Other quant models that lost money include Renaissance Technologies’ U.S. equity fund.

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    China Says More Aid Coming as Downdraft From Trade War Rises

    This article from Bloomberg News may be of interest to subscribers. Here is a section:

    The signal of increasing urgency came just hours after purchasing manager reports showed an across-the-board deterioration that risks spilling into a broader drag on global growth. The world’s second largest economy is being damaged by its trade war with the U.S. and a domestic debt cleanup.

    With those pressing constraints, officials have added modest policy support so far, ranging from tax cuts to regulatory relief, rather than repeating the fiscal firepower seen after a previous slowdown. Investors seem unpersuaded by the drip-feed approach with the yuan hovering around a decade low and stocks sliding.

    “Accepting slower growth has long been a challenge for Beijing, but now the rate of slowdown is firmly out of the comfort zone,” said Katrina Ell, an economist at Moody’s Analytics in Sydney. “In recent years the balancing act has been addressing risks in the financial system against pressure to stabilize economic growth. It appears the latter is again more of a priority.”

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