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INVESTORS SHOULD FOCUS ON LONG TERM OPPORTUNITIES IN ‘NEW NORMAL’ OF LOW YIELDS, SAVILLS IM REPORT SAYS

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INVESTORS SHOULD FOCUS ON LONG TERM OPPORTUNITIES IN ‘NEW NORMAL’ OF LOW YIELDS, SAVILLS IM REPORT SAYS
  • Report pinpoints opportunities for 2017 in Europe’s winning cities, urban logistics, alternative real estate and tactical asset management 

Investors in Europe should focus on long term opportunities in ‘winning’ cities, urban logistics, alternative real estate and tactical asset management, according to a new report from Savills Investment Management (“Savills IM”), the international real estate investment manager.

The report, entitled Changing Landscape:European Outlook 2017, projects that European real estate markets on average have sufficient momentum to perform relatively well. Locations devoid of new supply are expected to see rental growth, and weight of money is sufficient to push prime yields down. Savills IM recommends risk adverse investors should focus on a defensive and income minded approach towards real estate, avoiding the temptation of moving up the risk curve and valuing assets higher than their intrinsic value which could lead to underperformance over the longer term.

The report likewise highlights that investors should beware of political unrest, the threat of terrorism and Italy’s brewing banking crisis.

Kiran Patel, Chief Investment Officer at Savills IM, commented:

“In the ‘new normal’ of low growth and low interest rates, delivery of what would be high real rates of return – considerably higher than in the past – could be considered as unrealistic. Something has to give. Either those target returns are reduced or the property market has to see a severe correction in capital values to improve entry prices.

“2017 is likely to be characterised by increased uncertainty, over whether the UK can retain beneficial access to the single market after the triggering of Article 50, the effect of US economic and foreign policy and the trend of surging populism across Europe. We recommend a defensive, income-focused approach towards real estate for risk adverse investors.”

Opportunities outlined in the report include:

Winning European cities:As the returns in traditional winning, larger global cities such as London, Paris and Berlin continue to mature, alternative opportunities can be found in 18-hour cities that offer walkability, short commutes and affordability to live and work. These new winners have good connectivity to the major cities and are likely to see future demand across the commercial real estate sectors. Such cities include Copenhagen, Oslo, Helsinki, Istanbul, Prague and Munich.

Urban logistics:Urban logistics is one of Savills IM’s preferred sectors in Europe, particularly in markets where Internet sales as a proportion of total retail sales are at or about to exceed the 5% threshold. This is certainly the case in the UK, Germany, France, Sweden and the Netherlands, but countries such as Spain, Italy and Poland are catching up.

Alternative real estate:Long-term trends in urbanisation and demographics support the appeal of alternative segments such as residential, student accommodation, care homes and medical centres and clinics. At the same time, the demand and supply conditions in some markets and the index-linked income of some of these asset types may deliver positive rental growth prospects in the future. The key sectors that will see strong activity this year are the multi-family, automotive, healthcare and socio-infrastructure markets in the UK, Germany, France, the Netherlands, the Nordics and, increasingly, Spain.

The report identified specific buying opportunities in Brussels’ central business district (CBD); sought-after locations in Amsterdam’s South Axis and city centre; Warsaw offices on long leases and core offices in Germany’s Big Seven as well as growing secondary cities in the country; edge-of-CBD offices in Stockholm; prime high street shops in Copenhagen and Helsinki; key cities in Germany and well-located retails parks in Austria, Italy, Spain and Germany; mixed-use high street properties in Warsaw; and mainstream residential in London.

It also notes buyers should approach with caution a number of sectors including central London offices until certainty emerges over the Brexit negotiations; chasing yields down on properties with fuller rents in Munich, Paris CBD and Stockholm; buying fringe or out-of-town locations in Warsaw; and being attracted to higher-yielding secondary assets that have limited rental growth potential in France, Germany, Italy and the UK.

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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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