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Investors can see new opportunities if they look past the headlines

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Oliver Barber
Oliver Barber, Co-founder of Kingsbridge & Carter, the property investment specialist www.kingsbridgecarter.com

While the vast majority of UK investors remain in a cautious and recessionary mindset, financial data is showing early signs of growth and recovery.The economy is healing and while property is set to deliver great returns, investors may be surprised which areas will perform best.Oliver Barber

As The Bank of England governor recently stated, since 2010 more new jobs have been created in the private sector than over any other two-year period since the mid-1990s.  The majority of new jobs and hours worked have increased outside of London, while total income across the country is again reaching new all-time highs each month.
The Great Recession gave employers every excuse they needed to reduce headcount from 2008-2010, meaning workforces are incredibly lean and ready to expand.  The credit crunch forced indebted businesses to improve or fold, forced individuals to reduce their debts and increase savings.  This has left the UK with healthier finances and more money available for business investment and retail spending.
It’s conditions like these that led to recovery from previous downturns and just like 1993, 1975 & 1955, the boom-bust-boom cycle will slowly assert itself again, with rising confidence and rising property prices
 
Retail sales are booming, industrial production is on a rising trend, manufacturing figures are increasing, mortgage lending is more frequent and repossessions are falling.  So why then, is it still common perception that house prices outside of London are a disaster?  It’s cool dinner party chatter that describes London as a safe bet, but there’s a 10-20% fall in regional house prices waiting in the wings.
For those willing to look past the headlines statistics show that: statistics show that:

  1. Mortgage payments in the North stand at 26% of mean take-home income, the lowest and most affordable figure in over 10 years.  This compares to 49% in London, meaning that even when fully adjusting for its higher average income, London property has already jumped to a level which is radically less affordable than property in the Midlands and North. 
  2. The house price to earnings ratio for first time buyers in the North is now 3.2 x average earnings, the lowest it’s been since early 2003.  This compares to a whopping 6.2 x average earnings in London.
  3. Rental yields are 30-50% higher in the Midlands and North than they are in London, meaning investors are earning far greater income when investing here.
  4. Despite London’s boom since 2009, inflation adjusted house prices for the UK as a whole are now below their 40-year trend.  This means that non-London house prices are already significantly below their long run average values, providing tremendous value for new buyers.
In short, investing in regional property may not sound as trendy or glamorous, but house prices in the Midlands and North aren’t about to collapse.  In fact, these areas are already such good value relative to local earnings that they’re almost certain to outperform those in London over the coming years.
 
Supporting this idea is a research piece by London based property specialist Hamptons International, who recently reported;
Regional values have fallen to a point where homes are becoming attractive to buyers again.

“There’s been four years of negative movement in the North and the Midlands; now there’s really good value out there,” Adam Challis, head of research for Hamptons, said in an interview. “The yawning gap between London and the rest of the country will moderate.”

 
With this in mind, the question remains that with this initial phase of stubbornly slow economic recovery grinding along, where will price rises come from?  In addition to already being tremendous value, there’s 5 years’ worth of pent-up demand from buyers completely frozen out by high deposit requirements since 2007.  There are hundreds of thousands of potential buyers who cannot wait to buy a home when the mortgage market begins to thaw.  Hundreds of thousands of reluctant rental tenants saving up deposits, grown adults forced to move back in with Mum & Dad to save up a deposit, even separated couples who still live together as they save up to move on.  There is enormous pent-up demand from prospective buyers who will act as soon as deposit requirements inch down.
On the topic of mortgages, Buy to Let lending is already up 18% year on year, perhaps an early sign of increasing confidence from both investors and lenders?  With total income making new all-time highs, stable property prices and renewed Government support, conditions are ripe for lenders to begin relaxing their criteria and begin competing again for new mortgage business.  This will provide a much needed thaw in lending practices and will allow the property market to regain some early momentum in 2013.
While London and its surrounding areas have seen an enormous influx of wealth from abroad, the rest of the UK relies more on mortgage availability to help encourage growth, which explains why London is always the first to turn higher after a recession, before other towns and cities gradually follow suit and play catch-up.  This same effect is happening again today.
 With regards to the performance of the housing market, house price corrections in the last three major UK downturns all lasted 4 years.  From 1952-1956, from 1971-1975 and most recently from 1989-1993.  History tells us that 4 years is the length of time it takes for the UK housing market to heal after a bubble bursts, and so far, this time around, history is once again repeating.  As Sir Winston Churchill wisely remarked ‘The further backward you look, the further forward you shall see.’
 
Economic growth won’t re-start with a bang, it will tiptoe up on us while we’re busy worrying about Europe, energy prices and all number of other concerns.  Bull markets traditionally begin in difficult times, climbing a ‘wall of worry’ that is overpowered by fundamental value and resilient economic strength.  It’s human nature, and this time around will be no different.
Regional property markets in this country will never be materially cheaper than they are now, and 2012 will mark the slow beginning of a long and powerful new bull market.  Buy to Let investors now have an incredible opportunity to prosper from the UK’s imminent revival.
 
 
 
 
 

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Oil falls after surging past $65 on Texas freeze

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Oil falls after surging past $65 on Texas freeze 1

By Stephanie Kelly

NEW YORK (Reuters) – Oil prices fell on Thursday despite a sharp drop in U.S. crude inventories, as market participants took profits following days of buying spurred by a cold snap in the largest U.S. energy-producing state.

Brent crude fell 41 cents, or 0.6%, to settle at $63.93 a barrel. During the session it rose as high as $65.52, its highest since January 2020.

U.S. West Texas Intermediate (WTI) crude futures fell 62 cents, or 1%, to settle at $60.52 a barrel, after earlier reaching $62.26, the highest since January 2020.

Brent had gained for four straight sessions before Thursday, while WTI had risen for three.

“The market probably got a little bit ahead of itself,” said Phil Flynn, a senior analyst at Price Futures Group in Chicago. “But make no mistake, this selloff in oil doesn’t solve the problems. The problems are going to persist.”

Though some Texas households had power restored on Thursday, the state entered its sixth day of a cold freeze. It has grappled with refining outages and oil and gas shut-ins that rippled beyond its border into Mexico.

The weather has shut in about one-fifth of the nation’s refining capacity and closed oil and natural gas production across the state.

“The temporary outage will help to accelerate U.S. oil inventories down towards the five-year average quicker than expected,” SEB chief commodities analyst Bjarne Schieldrop said.

Prices dropped despite a decrease in U.S. oil inventories. Crude stockpiles fell by 7.3 million barrels in the week to Feb. 12, the Energy Information Administration said on Thursday, compared with analysts’ expectations for an decrease of 2.4 million barrels.

Crude exports rose to 3.9 million barrels per day, the highest since March, EIA said.

“The big nugget was the big jump in exports of crude oil,” said John Kilduff, partner at Again Capital in New York. “We’ll have to see what happens with that next week weather in Texas, but I have been looking for a pickup there for a while.”

Oil’s rally in recent months has also been supported by a tightening of global supplies, due largely to production cuts from the Organization of the Petroleum Exporting Countries (OPEC) and allied producers in the OPEC+ grouping, which includes Russia.

OPEC+ sources told Reuters the group’s producers are likely to ease curbs on supply after April given the recovery in prices.

(Additional reporting by Yuka Obayashi in Tokyo; editing by Emelia Sithole-Matarise, Steve Orlofsky, David Gregorio and Jonathan Oatis)

 

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GameStop frenzy sparks fresh investment in stock-trading apps

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GameStop frenzy sparks fresh investment in stock-trading apps 2

By Jane Lanhee Lee

OAKLAND, Calif. (Reuters) – The recent trading frenzy centered on GameStop Corp and other “meme” stocks is sparking a wave of investor interest in start-ups aiming to mimic the success of Robinhood Markets Inc, whose no-fee brokerage app has helped drive a trading boom.

Public.com, a direct competitor to Robinhood that boasts a host of blue-chip backers, said on Wednesday it had raised $220 million, valuing it at $1.2 billion on the private market. Another well-heeled rival, Stash, said earlier this month it had raised $125 million, while Webull Financial LLC, backed by Chinese investors, is also raising fresh funds after enjoying an influx of new users.

Robinhood, meanwhile, raised some $3.4 billion in the midst of the GameStop furor to assure its stability amid rapid growth and demands by its trading partners that it post more collateral.

The fresh investments are coming even as government regulators ramp up scrutiny of Robinhood and others involved in the GameStop trading. A U.S. congressional committee on Thursday grilled the chief executive of Robinhood and a YouTube streamer known as “Roaring Kitty,” among others, as it probes possible improprieties, including market manipulation.

Robinhood came under stiff criticism from some quarters for restricting trading in GameStop and other shares at the height of the frenzy, a move the company says it was forced to make due to requirements of partners that settle trades. It has also drawn scrutiny for a business model that relies on payments for sending trading business to partner brokerages, a practice Public.com and some other rivals are pledging to avoid.

Investors see rich opportunity in bringing easy stock trading to smartphone users globally, though the companies say they are also cognizant of the risks.

Stash, which doubled its active accounts to over 5 million by the end of last year, operates with only four trading windows a day to discourage rapid speculative trading, it said.

U.K.-based Freetrade.io told Reuters by email that its user numbers last year grew six-fold to 300,000 and by mid-February had reached 560,000. It said it had raised a total $35 million, including from crowd-funding rounds from over 10,000 customers.

But it does not offer margin trading or riskier offerings. “These products encourage investors to behave as if they are gambling or speculating rather than investing,” a Freetrade.io spokesman said.

Interest in trading apps is soaring globally. In Mexico, trading app Flink launched seven months ago and already has a million users, according to co-founder and chief executive Sergio Jimenez. He said Mexicans can buy fractions of U.S. stock through the platform, but not Mexican stocks – yet.

“Ninety percent of them are investing for the first time,” said Jimenez.

Flink raised $12 million in a funding round in February led by Accel, an early investor in Facebook. Accel is also an investor in Public.com and Berlin-based Trade Republic Bank Gmbh, which allows European retail investors to buy fractions of U.S. stocks, according to Accel partner Andrew Braccia.

“The bigger story here is there’s just this global trend of… accessibility,” he said.

Start-up investors also see opportunity in the infrastructure behind the trading apps. DriveWealth, which serves Mexico’s Flink and 70-plus other online trading apps around the world, has hundreds more partnerships in the pipeline, according to founder and chief executive Bob Cortright. DriveWealth provides the technology to power digital wallets and trading apps, and also provides clearing and brokerage service to its business partners.

“This is this is only beginning,” said Cortright. “The fact that you could have a smartphone in your hand in India, for instance, and buy $10 worth of Coca-Cola stock at an instant, that’s pretty game-changing.”

Venture capital investments in U.S. fintech companies hit a record last year with $20.6 billion invested, according to data firm PitchBook. Globally, around $41.4 billion was invested in fintech companies in 2020.

(Reporting By Jane Lanhee Lee in Oakland; Editing by Jonathan Weber and Dan Grebler)

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Analysis: Debt-laden world, rising bond yields – a toxic taper tantrum combo

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Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 3

By Dhara Ranasinghe and Karin Strohecker

LONDON (Reuters) – In May 2013, bond investors threw a tantrum after hints the U.S. Federal Reserve might slow the money-printing presses. A similar selloff now, with another $70 trillion added to global debt, could prove to be far more vicious.

A 2013-style “taper tantrum” was named as one of the top market risks in BofA’s February poll of fund managers who fear a pick-up in inflation expectations might soon persuade central banks to start withdrawing or “tapering” stimulus.

Some like former U.S. Treasury Secretary Larry Summers even predict this will happen sooner than anticipated if huge government spending sparks runaway inflation.

Such fears drove U.S. 10-year borrowing costs to near-one year highs on Tuesday. Equities slipped off record peaks; long-dormant gauges of Treasury market volatility flickered into life.

“Higher rates means higher rates volatility, means higher spreads and market selloffs as we saw back in 2013,” said Kaspar Hense, portfolio manager at BlueBay Asset Management who has pared exposure to Treasuries, expecting their 30-40 bps year-to-date yield rise to continue.

“There is no doubt the risks are greater this time around than 2013 because of the high leverage in the system.”

Global debt today stands at $281 trillion, according to the Institute of International Finance, versus $210 trillion in 2013. Companies and households too owe significantly more.

Economic growth and inflation can whittle away debt. Yet the very policies put in place to aid recovery can encourage more borrowing.

Debt is keeping central banks in “a loop of never-ending provision of liquidity and of very low interest rates,” said Steve Ellis, global fixed income CIO at Fidelity International.

“The only way to keep the plate spinning is keep refinancing costs low.”

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 4

Graphic: Debt levels on the rise since 2013 Taper Tantrumb – https://graphics.reuters.com/GLOBAL-BONDS/TANTRUM/bdwvknkrepm/chart.png

What bears watching is the “real” or inflation-adjusted bond yield that represents the true cost of capital. The 100 bps-plus spike in real U.S. yields of 2013 has not happened so far this time, sparing equities and emerging markets the fallout.

It also implies markets are not factoring a central bank response to higher inflation expectations.

That may be why, taper tantrum fears notwithstanding, BofA survey participants are holding equity and commodity allocations near decade-highs — with real yields near minus 1%, U.S. stocks still pay a 5% premium over bonds.

HIGHER, LONGER, WILDER

It’s not just the sheer weight of debt that makes markets more sensitive to interest rate moves.

After the interest rate collapse of recent years, just 7.8% of global government and corporate bonds on the Tradeweb platform yield 3% or more.

Global shares trade at 20 times forward earnings versus 12.5 times in May 2013.

Investors have fanned out into higher-yielding junk-rated debt and the BofA survey found a record proportion holding above-normal risk exposure.

Finally, investors are loaded up on longer-maturity debt.

Duration — how long it takes to recoup the original investment — is now 8.5 years on the ICE BofA World Sovereign Bond Index, two years more than in 2013.

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 5

Graphic: Investor exposure to duration rises – https://graphics.reuters.com/GLOBAL-BONDS/oakveradypr/chart.png

Longer-dated assets also expose investors to higher ‘convexity’ in the price-yield relationship, meaning a small rise in yields causes outsize losses.

That’s been highlighted this year to holders of Austria’s 100-year issue where a 35 bps yield rise has knocked prices 20% lower. Similarly, a 40 bps rise in 30-year U.S. yields has translated into a 4% price fall.

Ellis estimates holders of 10-year Treasuries would lose 4.62% over a month if yields rise 50 bps from current levels. A similar rise would have caused a 4.46% loss in 2013.

Similarly, JPMorgan Asset Management calculates a 1% rise across the U.S. curve would cause total annual price returns on a 30-year Treasury to fall 19%. Two-year notes would suffer a 2% price loss.

NOT ALL BAD

Some say delaying the tantrum might make matters worse.

“It’s better to put up with the tantrum when someone is two than when they are 14,” said David Kelly, chief global strategist at JPMorgan Asset Management.

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 6

Graphic: Are markets gearing up for another taper tantrum? – https://fingfx.thomsonreuters.com/gfx/mkt/yzdpxwndrvx/tapertantrum1502.png

But most policymakers have made clear they will not hurry. Cleveland Fed President Loretta Mester for instance said the Fed was keen to avoid taper tantrums and wouldn’t withdraw support until the economy was stronger.

Central banks also are less keen than previously to tighten policy in response to a price surge, having repeatedly pledged low rates even if inflation overshootsm.

Scars from 2013 and higher global indebtedness will force central banks to “lean against” market tantrums, asset manager BlackRock reckons.

Finally, emerging markets which bore the brunt of past tantrums, appear better placed this time. Many countries, including those reliant on foreign capital in 2013, now run balance of payments surpluses.

“Positioning in emerging market securities and currencies is far below previous cycle peaks, especially 2013,” said Bryan Carter, head of EM debt at HSBC Asset Management, pointing to higher bond risk premia and cheaper valuations.

Analysis: Debt-laden world, rising bond yields - a toxic taper tantrum combo 7

Graphic: U.S. yields and EM capital flows – https://fingfx.thomsonreuters.com/gfx/mkt/oakvermzxpr/US%20yields%20and%20EM%20capital%20flows.PNG

(Reporting by Dhara Ranasinghe, Sujata Rao and Karin Strohecker; additional reporting by Saikat Chatterjee; editing by Sujata Rao and Toby Chopra)

 

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