It was reported recently that 2 new luxury flats in Hong Kong had been put on the market for a record per square foot price of HK$75,000 (US$9,640) as the buoyant economy and stock markets on the Chinese mainland had lifted demand for exclusive properties even beyond pre-crisis levels. Sun Hung Kai Properties, the world’s biggest developer by market value, now aims to sell the three-storey apartments – on the 91st to 93rd floors of twin 270m towers – for HK$300m each, HK$50m more than previously priced.
Singapore Property Price Index had risen so much so fast that in fact the government had to recently take steps to cool down the housing market.
The Standard & Poor’s 500 Index has had the biggest rally since the 1930s as it has climbed over 50 percent in six months; the Shanghai Stock Exchange Composite Index nearly doubled from November to July before pulling back last month and the Indian stock exchange has almost doubled from its lowest point this year.
On the other hand, Nuriel Roubini, the NY University professor also known as “Dr Doom” who in 2006 foretold the worst financial unraveling since the Great Depression wrote in the FT that, “There is a big risk of a double-dip recession,” He had earlier written in March that the advance was a “dead-cat bounce,”.
Interviewed recently by CNBC Roubini said "It's going to be death by a thousand cuts. The financial system is severely damaged, and it's not just the banks. The gap between supply and demand is so huge we could stop producing new homes for a year to get rid of all the inventory," he said.
So are we there yet or not – remember that during the decade-long Great Depression there were many stock rallies, including a 67% gain in the Dow in 1933. So is this what it is – a dead cat bounce, as Professor Roubini calls it?
Don’t know, but please see below the movement in BSE Sensex since Jan 2007 and its PE multiple:
What seems clear is that the Indian market is now back to where it was in August/ September of 2007. And just like those times, it is very difficult to find value in the prices – at 20+ x on PE, I am not sure if things are cheap anymore. There are other factors such as dividend yield and Price to Book which are giving the same message.
Fact is that we have heard a lot about the “green shoots”, but the way the markets have moved up, it seems everyone is already discounting that the green shoots will soon become large forests. To me, it seems that though some of the imbalances underlying the credit crisis are ebbing, others are persisting and new ones are being created by policymakers’ attempts to stimulate economies and markets. Everything is not yet hunky dory and to my mind atleast 2 issues remain:
1. US fiscal issues and related issues
2. Bubbles in emerging markets
On the US fiscal issues, I came across a nice statistic recently – one year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.
Hence, the US government is financing 9 out of 10 new mortgages; if you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government; if you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank. And if you buy life insurance from the American International Group, you will be buying from a company that is almost 80 percent federally owned.
For much of the period since the Second World War, the dominant force in global demand has been consumption in the developed nations, with US consumers being the largest single block. The mirror of this was in Asian countries, which had low consumption but managed to expand their exports and built large FX reserves in the process.
However, the recent crisis had a dramatic effect in reducing these imbalances rapidly. The US trade deficit shrank from around –5% percent of GDP in early 2008, to –2.4% in early 2009. The household savings ratio fell close to zero during the boom as a result of easy credit, but rose steeply as the crisis intensified, reaching almost 4.5% in the early months of 2009, taking it halfway back to the level of around 9% that prevailed for three decades before Mr. Greenspan’s expansionary Fed policies. Will this remain at the same levels or will the consumption go back to earlier levels soon?
Can the Asian countries, faced with export declines of between a quarter to 50%, regain growth without relying on the (earlier) booming consumer markets like the US and boost domestic demand on their own? Can the developed economies of today manage to keep their banking systems stable and can its consumers reduce debt relative to income gradually rather than suddenly?
In 2007, the US accounted for about 30% of world con¬sumption while China accounted for 5.3%. It is being projected in some quarters that China will overtake the USA as the largest consumer market by 2020. By then, China is expected to account for 21% of global consumption, and the USA for 20%. The assumption is that this will result from a combination of China’s income growth, currency appreciation, demographics, in addition to the deleveraging effect among US consumers.
This view is widespread. Recently, Sir John Major, former Prime Minister of UK was asked as to which countries he thought will likely lead us out of this recession. His answer: China. Perhaps followed by other parts of South East Asia as well.
Are we relying too much on China – whose transparency in facts and figures are much in suspect? Are we at the cusp of a historic shift in consumption pattern from the developed to the developing nations? Is the market recovery too soon too fast? Are there bubbles forming – property/ stock prices etc, fueled by easy money availability?
I don’t know the answers to this and the many questions that are being asked. What I do know is that with price and value in reasonable balance, the future course of the markets will largely be determined by future economic developments that defy prediction. There are very few names that are compelling buys at this point in time.
On balance, I do think that while Armageddon may be off the table, better buying opportunities may lie ahead. Unfortunately I am sure there are many others like me (not to mention institutional funds) waiting to invest their monies at the hint of a fall. So either the fall has to be huge and dramatic, or else we just need to go back to being tactical in investments again and not look for the easy kills anymore. Time will provide the answer to that one. Meanwhile, my money is lying safe in my bank account. I hope.
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