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China Macro Outlook

China’s National Bureau of Statistics (NBS) was created to track agriculture and production in the state-owned enterprises. In a command economy, the statistics bureau’s primary purpose is tracking physical output to ensure that economic activity meets preset production goals; this allows the state to allocate raw materials. Consequently, rather than tracking the output contribution of each sector, the NBS focused more narrowly on final physical production.2 Because the means of production are owned and operated by the state, tracking exact economic activity—such as physical inputs, outputs and technology levels—is more straightforward in a command economy. In a market economy, the statistics bureau tracks economic activity more broadly—focusing on the concept of variables like GDP, employment and unemployment—to obtain an economy-wide measure of macro growth.

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China's property boom is back with a vengeance! After many government measures to support the housing market, there has been a dramatic rise in transactions and prices. High-profile cities like Shenzhen, Guangzhou and Shanghai have led with significant price-rises

Given China’s demonstrated ability to conquer one export market after another, an important question for both would-be competitors and world policy-makers weighing up various protectionist measures is this: How has China been able to emerge as the world’s “factory floor”? The answer lies in the eight major “economic drivers” of the China price: low wages, counterfeiting and piracy, minimal worker health and safety regulations, lax environmental regulations and enforcement, export industry subsidies, a highly efficient “industrial network clustering”, the catalytic role of foreign direct investment (FDI), An undervalued currency. These drivers have been identified from research conducted as part of the “China price Project” at the Merage School of Business. The analysis yields several important insights for both policy-makers and management strategists.

Determination of the China price extends well beyond issues of cheap labour, currency misalignments, and a lax environmental regime―the “usual suspects” in many trade debates. Second, there are important synergies between many of the China price drivers. For example, both an undervalued currency and export industry subsidies help attract additional FDI, which in turn, facilitates industrial network clustering. Finally, aspects of many of the China price drivers appear to fall outside the norms of international trade agreements (e.g. the World Trade Organisation (WTO)) and/or international standards for environmental protection and worker health and safety.

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In 2019 China was the number 2 economy in the world in terms of GDP (current US$), the number 1 in total exports, the number 2 in total imports, the number 71 economy in terms of GDP per capita (current US$) and the number 29 most complex economy according to the Economic Complexity Index (ECI). The top exports of China are Broadcasting Equipment ($208B), Computers ($141B), Integrated Circuits ($108B), Office Machine Parts ($82.7B), and Telephones ($54.8B), exporting mostly to United States ($429B), Hong Kong ($268B), Japan ($152B), South Korea ($108B), and Germany ($96.9B). In 2019, China was the world's biggest exporter of Broadcasting Equipment ($208B), Computers ($141B), Office Machine Parts ($82.7B), Telephones ($54.8B), and Semiconductor Devices ($34.8B) 

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The Chinese economy has restructured steadily since the Global Financial Crisis (GFC) of 2008, with the growth driver shifting from exports to domestic demand. The service sector’s share of GDP has also risen persistently compared to that of manufacturing. Indeed, consumption has been the most important driver of growth in eight of the past nine years.

Upon successful control of the epidemic and counter-cyclical policy stimulus, the economy has recovered swiftly from 2Q2020 onwards, returning to the pre-pandemic growth path by the year’s end. Notably, the recovery has featured a unique “two-speed” recovery pattern. In particular, industrial production has recovered earlier and more powerfully, driven by policy-supported public sector investment, housing and auto demand, as well as surprising strength in exports. Consumer spending and the service-sector recovery lagged for most of the year.

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“Producer price inflation is probably close to a peak. Base effects will turn less favourable from this month onwards. And we think that coal and metal prices will drop back before long as the recent slowdown in credit growth starts to weigh more heavily on construction activity,” added Evans-Pritchard

“Consumer price inflation is likely to rise a bit further as a tighter labour market and easing virus disruptions lifts services inflation. But we don’t expect it to rise much above 2 per cent in the coming quarters. As such, it is unlikely to trigger any shift in monetary policy.” China’s top economic planning agency, urged all provincial-level authorities to regulate the commodity market, strengthen supervision and make every effort to ensure adequate supply and stable prices of important products. 

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China cash rate (Policy Rate: Month End: China: Rediscount Rate) was set at 2.00 % pa in Jul 2021, compared with 2.00 % pa in the previous Jun 2021. China Policy Rate averaged 2.25 % pa and is updated monthly, available from Jan 1998 to Jul 2021. The data reached an all-time high of 6.03 % pa in Jun 1998 and a record low of 1.80 % in Nov 2010. Other key monetary policy rates of The People's Bank of China are also 1-Year Nominal Lending Rate and 7-Day Reverse Repurchase Rate. In the latest reports, China Short Term Interest Rate: Month End: SHIBOR: 3 Months was reported at 2.46 % pa in Jun 2021. Its Long Term Interest Rate (Treasury Bond Yield: Interbank: Spot Yield: 10 year) was reported at 3.10 % pa in Jun 2021. China Exchange Rate against USD averaged 6.42 (RMB/USD) in Jun 2021. Its Real Effective Exchange Rate was 150.27 in Jun 2021. 

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Chinese stocks are now trading at modest valuations—with a lot of bad news already priced in and economic growth likely to remain robust—investors say the second half of 2021 will likely improve. Still, the outlook for tech giants that dominate international China stock indexes remains murky—and the companies continue to struggle—so it will be hard for the broader market to make much of an advance. Shares from China are likely to give back about 8% on a total return basis, a measure that includes reinvested dividends, over the next 12 months, said Jack Siu, Credit Suisse’s chief investment officer for Greater China. That is roughly in line with his expectations for the global market. Chinese stocks have more attractive valuations than their American peers and offer the best medium-term growth potential outside the U.S., said Yichan Shu, Asia-Pacific senior investment strategist at State Street Global Advisors, something she said should support the market. The MSCI China traded at 15.5 times forecast earnings, according to estimates compiled by Refinitiv. That is a roughly 17% discount to the equivalent global index, which is heavily weighted toward U.S. stocks.

While expansion in China’s gross domestic product has slowed in recent years, it is still one of the world’s fastest-growing major economies. Its GDP rose 6% in 2019 and 2.3% last year despite the pandemic.

For international investors, one of the most important questions is how long China’s technology giants will continue to suffer under a regulatory clampdown. It has focused on monopolistic behavior, data privacy, financial stability and employee welfare—and has already helped wipe out hundreds of billions of dollars in market value. 

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Chinese stock market has never been suitable for the faint-hearted. Shares have been traded in Shanghai only for three decades but during that time the market has been experiencing some of the worst bubbles the world has ever seen. Between January 2006 and October 2007, the average price-earnings ratio of Shanghai stock exchanges increased from 17 to 70. It only took nine month for the P/E ratio to drop below 20 again. Compared to the previous bubbles, the valuations at the end of 2015 were quite modest. P/E ratio only doubled between 2014 and 2015 which barely even count as a bubble when previous price increased are taken account.

One reason for the chaos in the Chinese stock market is the lack of institutional investors. Chinese government is restricting international investors from directly owning mainland listed shares. A large portion of the shares are held by individuals with little experience in investing who have been buying stocks with borrowed money and high expectations. This has been creating price bubbles that the government has not been able to control. The price control mechanisms that the authorities have been implementing in order to stabilize share prices are only making the situation worse. Only true solution is modernizing the whole Chinese stock market and opening mainland exchanges fully to foreign investors.

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Is Japan a long-term opportunity?

Japan is leading the international markets in terms of underlying dividend growth. Companies in the land of the rising sun have been steadily increasing their dividend payouts, helped by their stable profit margins and cash hoards. The estimated dividend yield on the Topix 500 index, which tracks large Japanese companies, is about 2.5%, according to a recent note by Société Générale Cross Asset Research.Screenshot 5

The dividend yield, which had mostly remained steady since 2013, has been moving up recently, “indicating that Japan Inc. is getting more used to the idea of paying out cash as dividends,” according to Société Générale Cross Asset Research.

Looking across regional indexes, whether looking at the trailing three-year or trailing five-year changes in dividends, Japan1 stands out from broad international indexes like MSCI EAFE or MSCI Europe. The five-year numbers come in at almost double digits - very close to the U.S. markets. For the latest three years, Japan came out with a dividend growth figure higher than the U.S. Over the last ten years - a period that includes the financial crisis - eurozone regional indexes still show lower overall dividends in 2017 than they did in 2007. Again, the three-year dividend growth shows a meaningful pickup recently.

Domestic Growth Driver

The economy grew at a slower pace than initially estimated in the second quarter as the United States-China trade war prompted a downward revision of business spending, intensifying calls for the central bank to deepen stimulus this month. Weakness in the global economy and trade protectionism has emerged as risks to growth and added some pressure for the Bank of Japan (BOJ) to expand stimulus when it meets next week. The economy grew an annualized 1.3 percent in April-June, weaker than the preliminary reading for 1.8 percent annualized growth, revised Cabinet Office data. The annualized growth rate translates into a quarter-on-quarter expansion of 0.3 percent from January-March, compared with a preliminary reading for a 0.4 percent gain. The outlook for the world’s third-largest economy remains clouded as risks from declining manufacturing overseas and at home hit exports. Analysts have also warned of a possible drop in domestic consumption after Japan raises its sales tax to 10 percent next month, which could run one of the economy’s few growth drivers. Amid the risks to growth, BOJ Governor Haruhiko Kuroda has kept the door ajar for cutting interest rates further into negative territory, saying last week such a move is among the bank’s policy options. Speculation is growing that the BOJ could ease policy as early as this month to prevent the yen from spiking, an increasingly likely prospect if the U.S. Federal Reserve and the European Central Bank unveil new easing measures.Domestic growthScreenshot 1Screenshot 2

Investment Focus

In 2013, the ratio of Japan’s inward FDI stock to its GDP was 3.5 percent, the lowest among developed countries, and far below the global average of 34.1 percent. The U.S. and Germany, for instance, have ratios seven to eight times higher than Japan, while China and South Korea have ratios three to four times that of Japan’s. Inward FDI in developed countries is characterized more by mergers and acquisitions (M&A) - involving buyouts of existing companies - than by greenfield investments entailing the establishment of new companies. In this context, M&A by foreign companies in Japan is sluggish. Receiving direct investment from international companies promotes economic growth by increasing venture, production, and employment. But the benefits of receiving direct investment are not limited to these quantitative expansions. They also include qualitative improvements through transfers of advanced technology and management know-how to Japanese companies. Higher productivity also stems from intensified competitive pressure on Japanese companies.
Similarly, consumers benefit from the availability of new products and services. Aware of the contributions inward FDI could make to Japan’s economic recovery and medium- to long-term growth, the Abe administration - in a revised version of its Japan Revitalization Strategy released in June 2014 - advocated expanding inward FDI. The strategy aims to double the 2012 year-end inward FDI stock by 2020. This expansion is a crucial part of the third arrow of Abenomics’ approach to growth. What factors hinder inward direct investment in Japan? In opinion surveys of foreign companies conducted by the Japan External Trade Organization (JETRO), the Ministry of Economy, Trade, and Industry and others, the problem most commonly cited by foreign companies seeking to operate in Japan is the high cost of doing business. Specifically, the high corporate and other tax rates applicable to companies and high office rents. Among the other obstacles noted were: the closed and peculiar nature of the market and administrative procedures, the complexity of approval and licensing systems, the difficulty of securing needed personnel, and, in particular, the scarcity of staff capable of communicating in English.Screenshot 6

Surveyed companies pointed out that M&A in Japan is sluggish. They said that this is due in part to tax regimes and procedures that make it harder to pursue M&A than in other developed countries and in part, to the significant barrier of closed corporate governance in Japanese companies that inhibits M&A. Recognizing the need to expand inward FDI, since the 1980s, the Japanese government has been pursuing a variety of policies to encourage such investment - offering foreign companies low-interest loans, tax breaks, debt guarantees, and useful information. The second Abe administration, inaugurated in 2012, sought to reduce or eliminate factors inhibiting investment in Japan by setting targets to double inward investment, creating a council for foreign direct investment promotion to help achieve these targets, and implementing regulatory reforms. Japan is still leading the Southeast Asia infrastructure race against China, with pending projects worth almost one-and-a-half times its rival, according to the latest data from Fitch Solutions. Japanese-backed projects in the region’s six largest economies – Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam – are valued at US$367 billion, the figures show. China’s tally is US$255 billion. The figures underline both the rampant need for infrastructure development in Southeast Asia, as well as Japan’s dominance over China, despite President Xi Jinping’s push to spend on railways and ports via his signature Belt and Road Initiative. The Asian Development Bank (ADB) has estimated that Southeast Asia’s economies will need US$210 billion a year in infrastructure investment from 2016 to 2030, to keep up the momentum in economic growth. The latest Fitch figures count only pending projects – those at the stages of planning, feasibility study, tender, and currently under construction. Fitch data in February last year put Japan’s investment at US$230 billion and China’s at US$155 billion.

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Portfolio Rebalancing Global Investors
The portfolio rebalancing channel – achieved through large-scale purchases of assets – is one of the major transmission channels envisaged by a central bank under the zero or effective lower bound (Joyce et al. 2012). To realize this channel, the Bank of Japan (BOJ) launched quantitative, qualitative monetary easing (QQE) in April 2013 by the large-scale purchase of Japanese Government Bonds (JGBs) with the maturity extended to the maximum 40 years. In September 2016, the BOJ shifted the official guideline for market operations from the monetary base (hence the amount of JGB purchases) to the 10-year yield (with a negative interest rate of -0.1%). At the same time, the BOJ emphasized a continuation of an annual pace of JGB purchases of about ¥80 trillion – suggesting its high evaluation of this channel. This column will assess whether the portfolio rebalancing channel has been active in Japan by focusing on the three entities – financial institutions, firms, and households, separately.

The portfolio rebalancing channel raises aggregate demand, and hence inflation, by encouraging investors to change the composition of their portfolios, thereby lowering funding costs and raising various asset prices directly. The BOJ expanded its degree of monetary accommodation substantially (as evidenced by the ratio of the BOJ’s assets to GDP has exceeded 90%), and has also purchased risk assets directly, such as exchange-traded funds and real estate investment trusts. Therefore, the BOJ has envisaged that portfolio rebalancing of financial institutions would take place forcefully, from safe assets (i.e., JGBs) to risk assets (such as bank loans, M&A, outbound foreign direct investment, and other domestic and international securities investment). Together with the banking sector’s provision of innovative financial services, households’ portfolios would be rebalanced from safe assets (such as bank deposits and cash) to risk assets (such as residential investment, investment in equity investments, and investment trusts, etc.). Firms would be encouraged to shift from holding bank deposits and cash to expanding business fixed investment, M&A domestically and overseas, R&D, outbound foreign direct investment (FDI), and so on. In other words, the unprecedented massive monetary easing is aimed at energizing Japan’s economy by promoting ‘healthy’ risk-taking behavior among financial institutions, households, and firms, which has been lacking since the collapse of the equity and real estate bubbles in the early 1990s.

The bank loans to deposit ratio declined rather than increased is unique among advanced economies in terms of the abundance of deposits relative to the size of the financial industry. For example, deposits and currency held by Japanese banks accounted for 45% of the total liabilities of all financial intermediaries (covering depository corporations, pension funds and insurance firms, and other financial institutions) in June 2016. The ratio is higher than that of the Eurozone (34%) and the U.S. (16%), according to the BOJ estimate using the flow of funds data (BOJ 2016). Focusing on depository corporations in Japan, bank deposits have substantially exceeded bank loans. The limited demand for credit relative to abundant bank deposits is a structural phenomenon, as evidenced by the persistently low bank loans to deposit ratios. The ratio dropped from 66% in 2000 to 53% in 2016 (Figure 1). This reflects that the pace of an increase in bank deposits has been faster than the speed of growth in bank loans.

dividendsshare buyback

The Outlook For The Shrinking Markets Of Goods And Services

JGB holdings mainly fill the gap between loans and deposits. This suggests that abundant capital has not been utilized efficiently for productive purposes in the private sector. Long-standing limited demand for credit reflects not only the actual rapid pace of aging and its declining population but also the outlook for the shrinking markets of goods and services.
Since 2013, Abenomics and QQE have enabled stagnant loan growth to turn positive, and the year-on-year loan growth has since remained at around 2%–3%. As for corporate loan growth, more than 50% of the growth has been allocated to the real estate sector. Growth of households’ mortgage loans showed a moderate pick up. Growing bank lending to the real estate sector has been related to loans to real estate investment trusts, construction activities (partly related to the 2020 Tokyo Olympic Games), as well as loans to housing for rent (mainly driven by tax-saving purposes as a result of the tighter inheritance taxation). Nevertheless, loan growth remains too moderate to offset a decline in the interest rate margins. Deposit growth, rather than slowing, grew even faster than bank loans as explained below; thus, the already low loan-deposit ratio dropped even further – contrary to the phenomenon expected under the portfolio rebalancing channel.

Figure 2 indicates that the ratio of loans to total financial assets has declined over the past four years. The decline in the ratio of debt securities’ holdings (comprised mainly of the JGBs) – mostly as a result of selling the JGBs to the BOJ – was replaced by an increase in deposits (primarily comprised of the current account balances at the BOJ). The ratio of foreign investment did not show a rising trend over the same period. This reveals that the portfolio rebalancing channel has not been reliable to the extent expected by the BOJ, although it has been successful in lowering lending rates. Households traditionally prefer bank deposits. Deposits and currency accounted for around 50% of households’ total financial assets from 2000 to 2016 (Figure 3). Such large-scale holdings of deposits are quite remarkable, given that the deposit interest rate is about 0%. The household sector has remained a substantial net creditor as households’ deposits (about ¥940 trillion currently) have significantly exceeded their loans (about ¥310 trillion) for a long time. Since their deposits grew faster than their loans, the deposits to loan ratio rose moderately over the period since the adoption of the QQE – contrary to the phenomenon expected under the portfolio rebalancing channel.

QQE contributed to raising households’ equity and investment fund shareholdings as a share of total financial assets moderately from around 12% in 2013 to 13%–14% in 2016. However, the ratio did not exceed the maximum (17%) reached in 2007 before the Global Crisis. The household sector remained a net seller of stocks most of the time over the past four years – partly because stock prices rose but achieved only about a half of the historically highest level achieved in the past, and partly because of large fluctuations of the stock prices. Households’ holdings of debt securities accounted for only 1%–2% of total financial assets over the same period partly because a wide range of JGBs and other corporate bonds are available to professional investors as compared with households. Also, the corporate bond market is too small.

Japanese Firms, Highly Risk-Averse

The risk-averse behavior of Japan’s households is in contrast with that of households in the U.S. and the Eurozone. According to the BOJ’s estimates, deposits and currency accounted for 52% of households’ total financial assets in Japan in September 2016 while they accounted for only 14% in the U.S. in September 2016 and 35% in the Eurozone in June 2016. Equity holdings and investment trusts accounted for 46% in the U.S. and 25% in the Eurozone, while only accounting for 13% in Japan.

Japanese firms are known to be highly risk-averse, as demonstrated by their vast holdings of deposits and currency. The amount of deposits and currency held rose at an accelerated pace from 2013, owing to an increase in corporate profits. In 2016, the number of deposits and currency exceeded ¥240 trillion – about one-fourth of the firms’ total financial assets and about 45% of GDP. The high profitability was attributable to various favorable factors: the yen’s substantial depreciation, low lending rates, a series of corporate tax cuts, a sharp decline in commodity prices and imported materials in 2014–2016, and an increase in foreign demand since 2015.
This reflects firms’ choice to accumulate profits in the form of retained earnings rather than allocating them more intensively to expanding business fixed investment, M&A, R&D, foreign portfolio investment, and outbound FDI. While firms increased their non-residential fixed investment over the past four years, the amount of increase was moderate and remained well below cash flows or change in deposits and currency. Since 2013, firms have expanded outbound FDI, but the growth was average, and foreign assets related to FDI accounted for only half of deposits and currency in 2016. In the U.S., meanwhile, firms also increased their holdings of deposits due to an increase in profits over time and achieved about US$1 trillion in December 2016. However, the outstanding amount of deposits is relatively small compared with Japan, accounting for only 5% of firms’ total financial assets and 5% of US GDP. Besides, U.S. firms actively engaged in outbound FDI so that the number of foreign assets related to FDI recorded US$5 trillion, which is about five times as large as deposits. Firms’ non-residential fixed investment exceeded cash flows or change in deposits.

Equity Market: Profits Are Up, Deflation Is Over

Yet Japan’s stock market is widely reviled, valued even more cheaply than the struggling Eurozone.
Investors think Prime Minister Shinzo Abe’s “three arrows” of loose monetary policy, fiscal stimulus and reform of capital and jobs markets have misfired since he started Abenomics in 2012, and that they won’t reach their mark any time soon. Japan’s stock market is dominated by economically, and currency-sensitive cyclical stocks whose profits have soared but could crash back to the ground if the global slowdown worsens. Investors don’t value such cyclical benefits very highly anywhere, and they value Japan’s cyclical profits even less. Yet Abenomics isn’t such a dud as many investors seem to think it scored some hits—and Japan’s stocks merit watching if the global economy turns up.
It is both evident that Abenomics hasn’t hit its target, and at the same time, overly harsh to deem the prime minister’s efforts a complete failure. Inflation remains well below the 2% goal set shortly after his election, despite some of the loosest monetary policy ever seen outside Zimbabwe. But after almost two decades of deflation, the fact that there’s any inflation at all is a triumph.
Government spending didn’t offer much of a boost, and Mr. Abe shot the fiscal arrow into his foot in 2014 when his sales-tax rise caused a recession. The overall government budget is on track for the smallest deficit next year since the post-bubble recession of 1993, according to estimates by the International Monetary Fund, something which can’t help inflation. The reform program has helped encourage better allocation of capital by companies and supporting the existing trend of more women joining the workforce.
Earnings per share have risen faster even than in the U.S. recently, according to MSCI data. And figures collected by the Ministry of Finance show operating profit margins for big nonfinancial companies not far from the peak of 8.6% reached in the second quarter of last year, far above the 2007 high of 5.7%.
Historically, shareholders wouldn’t give companies credit for high profits because they could never get their hands on the money. Better corporate governance gives hope that less of it will be frittered away, and should support valuations. At the same time, Japanese manufacturers have improved their productivity since Abenomics began, at a time when most of the developed world has seen productivity growth slow, according to Conference Board data. (The Bank of Japan puts part of the blame for too-low inflation on productivity growth.)But there’s still a problem: Japan’s huge manufacturers are heavily exposed to global trade troubles and the value of the yen, and profit margins have been falling fast as both moves against them.


Japan’s Manufacturing Productivity

Real value added per hour worked in manufacturing, annual change
The nonmanufacturing sector hasn’t been hit the same way, but its operating profit margin of 5.4% has been flat since 2016. That doesn’t support a story of continuous improvement, even if it is far above the pre-Abe norm.
Shigeto Nagai, a former BoJ official now at Oxford Economics, argues that the single most significant change produced by Abenomics was to correct the overvaluation of the yen, which helped exporters most. The relatively muted gains of the yen in the race to safety this summer supports the idea that there’s less danger to Japanese stocks from a stable currency, but it’s too early to be sure.
The overall valuation of the market shouldn’t mislead investors looking for cheap stocks. MSCI Japan trades at 13.3 times estimated 12-month-forward earnings, precisely in line with the world excluding the U.S., and far behind the U.S.’s 17.4 times.
The country has the cheapest financials, the cheapest industrials, and the most affordable consumer discretionary companies, a sector that includes upmarket retailers and carmakers. Those three sectors account for half the market, more than the U.S., U.K., Eurozone, or emerging markets. If the world economy picks up, these stocks should do well, but few want to make that bet at the moment.
Look at the more defensive sectors, and the bargains are hard to see. Makers and sellers of consumer staples (such as toothpaste, alcohol, and tobacco) are more expensive than in other developed markets, as are health-care stocks. Japan’s energy and utility sectors are cheap. Still, the fourth-biggest utility by market value is Tokyo Electric Power Co., of Fukushima meltdown infamy, which trades at just 3.7 times forecast earnings. The energy sector is tiny, and its most significant stock barely profitable.
Investors who think the world economy can escape the doldrums and trade wars be resolved should consider Japanese stocks. Others should take heart from improving productivity and corporate governance and the possibility that the yen is losing some of its haven statuses, but shouldn’t get too excited by the cheapness.


Still there real estate investment oportunities in U.K?

Private renting is not a new concept in the UK, but it's only in the last few years that large-scale, institutional investors have made their mark on the sector. 2013 was the year things changed, whether you consider the watershed moment to be M&G’s acquisition of a Berkeley residential portfolio or Delancey funding the Athlete’s Village in Stratford.  The sector has expanded rapidly in the years since, with over 30,000 homes complete and a further 110,000 in the pipeline that will be built, let, and managed by professional investors as homes for rent.

Looking to the student accommodation sector as our benchmark, there’s at least a decade to go before institutional private rent reaches maturity. This means there is still scope for seismic shifts in the sector. There is also plenty of opportunity for new and innovative entrants to disrupt the market, as customer awareness and understanding of this tenure increases.  

Build to Rent

If you’re investing in asset classes that perform similarly especially in downward moving markets the answer could be no. On the contrary, investing in asset classes that demonstrate little or no correlation1 to one another may help you enhance diversification and reduce portfolio volatility. While diversification can neither ensure a profit nor eliminate the risk of experiencing investment loss, the ideal scenario is to have a mixture of non-correlated asset classes in an attempt to reduce overall portfolio volatility and generate more consistent returns over the long-term. Many investors who believe their portfolios are diversified may not be as diversified as they think. That’s because traditional portfolios are typically comprised of only stocks, bonds and cash. While stocks and bonds may provide some diversification*, there are other investment opportunities that could provide even more.


Overall the top five countries for investment in residential assets over the next 12 months is the UK (33 per cent), France (28 per cent), Germany (25 per cent), Spain (24 per cent) and Italy (18 per cent).  Signalling that the market is attractive for future investment, nearly three-quarters (74 per cent) of respondents plan to invest in European residential assets over the next twelve months. Of these, nearly one third (29 per cent) expect to invest more in 2021 compared to 2020, on average increasing assets by nearly 30 per cent. When investing, the majority (88 per cent) will also choose to enter new countries in partnership with a local developer or manager.  Traditional residential assets are the preferred haven choice for most investors, with nearly three-quarters (71 per cent) managing build or own-to-lease properties, while half (51 per cent) maintain student living premises and two-fifths (44 per cent) senior and retirement living spaces.   

The top reasons respondents cited as causes to be optimistic were that there is high demand due to a shortfall in supply (43 per cent), real estate income yields are higher than those for fixed income (43 per cent), and asset prices remain attractive (40 per cent). For those respondents that remain negative, concerns over the pandemic and more lockdowns (64 per cent), the recession impacting demand (51 per cent) and the fact that the real estate market lacks daily liquidity in comparison to equity and bond markets (46 per cent) were cited as the three main reasons.


While there may be a higher rental return on commercial properties, the purchase price range can be smaller than residential. 
Residential comparable sales are much easier to distinguish and gather potential price rise or fall information than in commercial. Also because of zoning changes, infrastructure and more. 
Commercial appreciation can be a more consistent journey as many potential value changes can be understood from rental improvements that are often built into the lease. Macro trends e.g. import and export activity, currency movements, ageing population etc.. and more have been partially responsible for the decreasing rental yields for warehouses and medical assets. Yields decreasing on commercial property, mean that people are willing to pay more on the purchase price for less rental income upside.

occupancy rate

Volumes should continue to grow solidly over the medium-term. The reasons will have nothing to do with the strength of demographic tailwinds or urbanisation rates. Don’t get me wrong - both remain hugely important and hugely supportive and will continue to be there. The Brexit noise in Government will abate somewhat this year, but it would be naïve to think that negotiations will be anything other than a significant distraction for policy teams. This could be viewed as a bad thing for multifamily housing, but with a Government set on the aspirational homeowner as its key policy priority, the lack of attention will in all likelihood mean that the industry can get on with delivery. Over the past 10 years, the entire UK Build to Rent industry has been non-fictionalised. Developers, supply chains, funders, planners, lawyers, advisors, operators and innovators have coalesced around a largely US-styled asset class and got on to create a pipeline of over 150,000 homes. That is largely despite rather than because of policy. The industry has a long way to go on its journey to maturity. Planners think Build to Rent is 'premium' product. Consumers think it's still about exploitation, rather than choice. Developers still  behave as though it’s a land value play rather than a value-generating income play. Operators are still learning about what it means to be truly customer-centric. These are issues that need to be tackled and while I have perhaps been a little unfair to many here, I'm speaking to most in this nascent sector. 

The lack of attention provides us with breathing space to learn, to grow, to mature. While Berlin and ultimately the German Government mess about with supply destroying rent controls, in the UK we can drive a consensus around rental supply as a force for good. While market actors in New York and San Francisco, Paris and Madrid all grapple with stock revaluations due to tightened rent regulation, in the UK we can use the cover to get our story straight. Tech innovation that improves quality of life. Check. Advanced manufacturing solutions that de-carbonises new stock, and builds supply chains to reduce the cost of retrofitting old stock. Check. Meaningfully leveraging the new tidal wave of Impact investors that see affordable housing as a big prize on the way towards a dual purpose of driving a commercial return and providing a true social good. UK Build to Rent has some growing up to do. The stakes, in housing terms, couldn't be higher. 

volumes build

Fintech, the sector of the future?

MA themes

Global fintech funding rose to $111.8B in 2018, up 120 percent from $50.8B in 2017, fueled by mega M&A and buyout deals, according to the KPMG Pulse of Fintech report. The fintech market in most areas of the world remained relatively healthy and well-poised for growth, also in 2019. 

Deals in the second half of 2018 were topped by Blackstone's $17B investment in Refinitiv, the $3.5B acquisition of Blackhawk Network by Silver Lake and P2 Capital Partners, the $3.4B buyout of VeriFone by Francisco Partners, and the $2.2B acquisition of iZettle by PayPal. These deals followed on the $12.86B acquisition of WorldPay by Vantiv in H1'18.

PE activity deal volumeFintech deal volume declined markedly in the second half of 2018, but still reached 2,196 deals for the year, up from 2,165 in 2017.  Increasing geographic diversity of fintech VC funding continues to help drive deal volume, even as larger fintech hubs see more concentrated investment in larger deals.

PE 2017 annual deal flow

“The growing deal sizes, higher levels of M&A activity and the geographic spread of deals all highlight the increasing maturation of the fintech sector on a global scale,” said Ian Pollari, Global Co-Lead, KPMG Fintech. “Fintech start-ups in markets as diverse as Germany and Brazil are attracting larger and later stage rounds, while the more established fintech leaders in the US, UK and Asia are making their own investments and acquisitions in order to expand their product and geographic reach.”

PE 2017 annual deal flowMA outllook by activity

2018, a year of multiple record highs across fintech investment

Mega deals drove a record $111.8B global fintech investment in 2018, led by three $10B+ deals, as well as an additional 14 $1B+ M&A deals. To be more specific, 2018 was a year of multiple record highs across fintech investment, including VC, corporate VC, M&A, and PE.
Fintech investment in the Americas rose from $29B in 2017 to $54.5B in 2018. Deals volume also increased from 1,039 deals to 1,245. The US accounted for the bulk of this funding - $52.5B across 1,061 deals.
European fintech investment for 2018 increased sharply to $34.2B from $12.2B in 2017, thanks to massive M&A and buyout deals, including WorldPay ($12.8B), Nets ($5.5B), iZettle ($2.2B), Fidessa Group ($2.1B), and IRIS Software Group ($1.75B).
The total Asia Pacific fintech investment for 2018 of $22.7B, up from $12.5B in 2017, was dominated by Ant Financial's record-setting $14B deal in Q2'18, as fintech investment in the region slowed significantly in the second half of the year.
Cross-border M&A rose significantly in 2018, with approximately $53.5B invested across borders in 155 deals, up from $18.9B in 153 cross-border deals in 2017. The US drew $28B in cross-border M&A, while Europe attracted $21.6B.
Investment flowed at a significant pace into key subsectors and technologies - regtech investment surged to $3.7B in 2018 from $1.2B in 2017, while investment in blockchain remained strong at $4.5B in 2018, just off the $4.8B in 2017.

annual worldwide deal flow

US sees record fintech investment and deal volume

US fintech investment for 2018 more than doubled to $52.5B, from $24B in 2017, across a record 1,061 deals. While M&A and buyout activity accounted for the majority of this funding, US-based fintech VC funding also rose significantly, from $7B to $11.4B. The $17B Refinitiv deal dominated the $25.4B investment in Q4'18.PE ma activity

Canada and Brazil continue to expand fintech investment

Latin America was a strong target for fintech investors in 2018, with Brazil achieving a record high of $556M across 28 deals. Canada saw a record 119 fintech deals in 2018 - bringing in $1.18B of investment.

Europe sees record annual investment despite decline in Q3 and Q4'18
European fintech rose exponentially in 2018 to a record $34.2B raised across 536 deals, compared to $12.2B in 2017. Much of the 2018 funding occurred during the first half of the year, with total investment slumping to $4.3B in Q3'18, and to $1.3B in Q4'18 - an eight-quarter low.
The UK's $20.7B, up from $5.6B in 2017, accounted for the majority of fintech funding for the region - more than half of which came from the $12.8B WorldPay acquisition in the first half of the year. Q3 and Q4'18 investment dropping significantly, suggesting that fintech investors in the UK may have drawn back due to Brexit uncertainties.
Germany and France experienced a drop-off of fintech investment in 2018. In Germany, $1B was raised across 57 deals, compared to $1.7B across 88 deals in 2017, while France saw $294M raised on 34 deals in 2018 versus $733M on 50 deals a year earlier.
Asian fintechs attract $22.7B in funding
Fintech investment in Asia rose from $12.5B in 2017 to a record high $22.7B in 2018, while deals volume dropped marginally from 382 to 372. VC investment was particularly strong in the fintech space in Asia, accounting for $19.6B in investment.

China accounted for the lion's share of Asia fintech investment, with $18.2 billion in funding during 2018 across 83 deals, led by Ant Financial's $14B raise in Q2. India fintech funding declined year-over-year, although still reaching $1.7B across a record 115 deals, while investment and deal volume in Singapore grew for the fourth straight year, accounting for $347M across 61 deals. Australia saw $572M across 28 deals.

M&A Activity, a positive outlook

M&A( Mergers and acquisitions) activity in the Fintech sector experienced a cooldown in the second half of last year from its high of 189 transactions in 1H2018, and all-time high disclosed transaction value of almost $50 billion. Even though transaction volume in 2H2018 was 160, total disclosed transaction value was just shy of $13 billion largely because there were no box-office deals such as Blackrock’s $17 billion acquisition of Thomson Reuters in the first half of 2018. However, tax reform, a more relaxed US regulatory climate, and growing cash reserves fuel optimism among US dealmakers. While geo-political and economic issues appear to be affecting confidence, there is plenty of evidence that companies are prepared to take on big strategic deals when opportunities arise. Investor’s appetite for fintech firms remains undimmed with M&A hitting a record $112bn in the first three months of 2019, despite signs of a slowing global economy and the threat of a disorderly Brexit in the UK. Across the year the sector is forecast to hit record mergers and acquisitions volumes as well as the industry’s second-highest financing levels, despite the threat of a trade war between the US and China.

IT Spending, a new record

Worldwide IT spending is projected to total $3.79 trillion in 2019, an increase of 1.1 percent from 2018, according to the latest forecast by Gartner, Inc.

The shift of enterprise IT spending from traditional (noncloud) offerings to new, cloud-based alternatives is continuing to drive growth in the enterprise software market. In 2019, the market is forecast to reach $427 billion, up 7.1 percent from $399 billion in 2018.

The largest cloud shift has so far occurred in application software. Gartner expects increased growth for the infrastructure software segment in the near-term, particularly in integration platform as a service (iPaaS) and application platform as a service (aPaaS).

The data center systems segment will experience the largest decline in 2019 with a decrease of 2.8 percent (see Table 1). This is mainly due to expected lower average selling prices (ASPs) in the server market driven by adjustments in the pattern of expected component costs.spending outlook

The 10 most valuable fintech companies in the world are mostly between six and 10 years old, all with hundreds of millions raised (if not $1 billion-plus) and multibillion-dollar valuations. Yet, at the moment, not one of those unicorn seems articularly close to an offeringIPO

FinTech Investment

Innovation is the process by which new ideas generate economic and social value. The emergence of FinTech has been critical in driving innovation and is a great contributor to growth and productivity within financial services. It’s become increasingly evident that technological innovation, through the emergence of FinTechs, is critical to the future of financial services. Innovation and FinTechs are key to increasing market access, the range of product offerings and convenience while also lowering costs. 

Screenshot 101

FinTech continued to be the hottest thing in tech during Q1 2019 – there was the launch of the Apple Card, the giant ($400 million) investment by Softbank in UK FinTech Oaknorth and the recognition by major brands like Goldman, ING and NatWest that it was time to create their own FinTechs and challenger brands (Marcus, Yolt and Mettle respectively).  Investments in global fintech firms fell 3.7% in 2019, hurt by a sharp decline in deal activity in China in 2019 against the backdrop of a bruising trade war between Washington and Beijing, according to a new report by consulting firm Accenture.  

Screenshot 102

Despite the steep fall-off in activity by Chinese companies, there were 3,472 deals worth US$53.3 billion globally last year, the second-highest value of investments since 2013, Accenture said. That compared with 3,251 investments worth a record-high US$55.3 billion in 2018.

Despite the future potential of emerging markets, fintech investors continued to favor the US, which retained the crown as the biggest market for fintech deals worldwide last year. The value of deals in the US jumped 54% to US$26.1 billion in 2019. Fintech investments in the UK rose 63% to US$6.3 billion, while India, Brazil, and Germany posted strong gains.

The largest fintech deal in China last year was the US$145 million financing of insurtech Shuidi Huzhu in June. Four deals, including the Ant Financial transaction, accounted for nearly US$20 billion in investment in China in 2018. Fintech deals in Singapore more than doubled to US$861 million in 2019, with 39% of investments going to payments startups, according to Accenture. Singapore had deals worth US$365 million in 2018.

Hong Kong saw its fintech investments nearly to double to US$374 million in 2019 as the city issued licenses to its first virtual banks, which are expected to make their debut later this year, Accenture said. That compared with US$188 million in 2018. It is important to note that some of the most high-profile fintechs which raised millions of dollars last year have yet to break even, never mind post a profit: Revolut, N26, the fintech units of Grab and Gojek, to name a few. Yet, that did not stop investors from continuing to support their costly expansion. Accenture's data show that the 92% drop in China's fintech investment was the main reason for the modest decline in global fintech investment last year.

Indeed, even as China cooled off, the rest of the world heated up. U.S. deals rose 54% to US$26.1 billion. Fintech investments in the UK rose 63% to US$6.3 billion. India became the world's No. 3 fintech market as deals almost doubled compared to 2018, reaching US$3.7 billion. Deals more than doubled in Singapore to US$861 million and rose 50% in Australia to US$1.1 billion. Deal value in Brazil almost tripled to US$1.6 billion. 

Screenshot 6

Is buying property in Europe a smart investment?

As Europe watches the clock tick down to Brexit, all eyes are on the real estate market in the major European cities. 

After almost four years of strong house price rises, Germany’s housing market remains robust, with the average price of apartments rising by 6.78% during 2018. This is an improvement’s from 2017 - 4.45% growth. The reasons are wrong economic growth, 1.1 million refugees, high work-related immigration, record-low unemployment, weak construction supply, and low-interest rates.

According to Savills, residential property transaction volumes in Germany surged by 19% to €8.8 billion (US$10 billion) in the first half of 2018 as compared to the same period last year.

Berlin’s economy, which is very dynamic compared to other German cities, will continue to drive high population growth. The demand will continue to grow in the residential market. Berlin apartment costs are around €4,991per sq. m. The city is currently facing a severe housing shortage. It is estimated that Berlin needs about 194,000 new units by 2030. Both the IMF and the European Commission expects the German economy to expand by 1.9% this year and in 2019.

Project Name Location Units Completion Date
EuropaCity Moabit 2,800 2025
Mein Falkenberg Falkenberg 1,200 2021
Mittenmang Berlin Moabit 1,000 2019
Pepitahöfe Spandau 1,000 2018
High rise building “Grandaire” Mitte 270 2020
Source: JLL

In Hamburg, median apartment prices increased 11.34% y-o-y to €3,985 (US$4,536) per sq. m. in Q3 2018. One- and two-family houses rose by 6.55% to €2,640 (US$3,005) per sq. m. Construction activity in Hamburg is well below demand. In 2016 and 2017, housing completions averaged 7,000 units annually, less than half of the estimated annual requirements for 15,000 homes, according to JLL. Hamburg Senate recently set a new-build target of 10,000 homes per annum.

Project Name Location Residential Units Completion Date
Pergolenviertel Winterhude 1,400 2020
Othmarscher Höfe Othmarschen 1,000 2018
SonninPark Hammerbrook 750 2019
Tarpenbeker Ufer Lokstedt 750 2021
Wohnquartier – Am Weißenberg Alsterdorf 490 2018
Source: JLL

In Cologne, median apartment prices rose by 4.19% y-o-y to €2,857 (US$3,252) per sq. m. in Q2 2018. One- and two-family houses had a price increase of 5.86% y-o-y to €2,349 (US$2,674) per sq. m.Due to its growing need for houses, on top of the high demand backlog from previous years, the City of Cologne plans to build about 6,000 new homes annually starting 2019.

Project Name Location Residential Units Completion Date
Clouth-Quartier Nippes 1,200 2021
Park Linné Braunsfeld 500 2018
Reiterstaffe Marienburg 500 2018
Cologneo I Mühlheim 490 2021
Wohnquartier Ossendorfer Gartenhöfe Ossendorf 430 2021
Source: JLL

With the highest apartment price increase in the region, Düsseldorf was rising by 8.7% to €2,625 (US$2,988) per sq. m. during the year to Q2 2018. Prices of one- and two-family houses also rose by 4.02% to €2,409 (US$2,742) per sq. m. Housing supply in Düsseldorf is not keeping up with demand, the same situation as in other German cities. There were just over 1,000 housing units completed in the town in 2017, a substantial decline from about 2,000 completions in the previous year and far lower than the annual requirement of 4,500 units.

Project Name Location Residential Units Completion Date
Le Quartier Central Derendorf 1,500 2020
Gartenstadt Reitzenstein Mörsenbroich 1,050 2020
Vierzig549 Heerdt 1,000 2025
le flair Pempelfort 900 2019
win win Wohnen im Medienhafen Hafen 410 2021
Source: JLL

In Stuttgart, apartment prices rose by 10.69% y-o-y to a median price of €3,261 (US$3,712) per sq. m. in Q2 2018, while the median price of one- and two-family houses rose by 7.54% to €2,992 (US$3,406) per sq. m.

Project Name Location Residential Units Completion Date
Wohnquartier Giebel Giebel 340 2023
Wohnen am Höhenpark Killesberg Feuerbach 200 2019
Wohnquartier Am Schwanenplatz Stuttgart Ost 100 2019
SWSG-Wohnanlage Zuffenhausen 80 2018
Rohrer Höhe Rohr 60 2018
Source: JLL

Apartment prices rose by 6.71% to €3,317 (US$3,776) per sq. m. during the year to Q2 2018, in Frankfurt. One- and two-family houses had a y-o-y price increase of 5.71% to €2,579 (US$2,936) per sq. m.

Over the past five years, housing completions averaged around 3,500 annually. However, this is well below the current demand for almost 6,000 units annually, amidst strong population growth.

Project Name Location Residential Units Completion Date
Quartier am Henninger Turm Sachsenhausen 1,000 2019
Wohnquartier Wings Gallus 630 2021
Hafenpark Quartier Ostend 600 2022
Wohnquartier Westend-Ensemble Westend 470 2021
Bright Side Gallus 420 2018
Source: JLL

Munich had the most robust y-o-y apartment price hike in South Germany in Q2 2018, increasing by 11.24% to €6,361 (US$7,241) per sq. m. Uver the same period, prices of one- and two-family houses rose by 10.08% to €4,771 (US$5,431) per sq. m.

The problem of excess demand is unlikely to diminish over the years, given the demand backlog from recent years, and the forecasts for further population and economic growth.

Project Name Location Residential Units Completion Date
Quartier Paul-Gerhardt-Allee Pasing-Obermenzing 2,400 2021
Stadtquartier Am Südpark Thalk.Obersendl.-Forsten-Fürstenr.-Solln 1,440 2019
Stadtquartier DiamaltPark Allach-Untermenzing 800 2020
Stadtteilentwicklung Prinz-Eugen-Kaserne Bogenhausen 600 2020
Domagk-Quartier Funkkaserne Schwabing-Freimann 590 2018
Source: JLL

In Dortmund, median apartment prices rose by 0.53% to €1,515 (US$1,725) per sq. m. during the year to Q2 2018. Likewise, The median price of one- and two-family houses increased by 1.95% to €2,042 (US$2,324) per sq. m.

Median apartment prices also soared in Dresden by 11.24% to €2,489 (US$2,833) per sq. m. during the year to Q3 2018. The one- and two-family houses increased 7.89% to €2,349 (US$2,674) per sq. m.

Apartment prices rose in Hannover by 8.67% to a median price of €2,357 (US$2,683) per sq. m. during the year to Q3 2018. The median price of one- and two-family houses increased by 6.66% to €2,018 (US$2,297) per sq. m.

Moderate rental yields in Germany

Germany’s rental yields are weak to moderate because investment in housing (including buy-to-let) used to be heavily subsidized by tax-break, and also because of the recent price rises. Many Germans live in rented accommodation, while 51.8% of Germany’s total households own their homes, according to Eurostat.

Rental yields according to Global Property Guide research, June 2017:

In Berlin a 120 sq. m. apartment can rent for around €1,500 a month, earning a yield of 3.5%,

In Munich a 120 sq. m. apartment can rent for around €2,250 a month, earning a yield of 3.5%.

In Frankfurt, a 120 sq. m. apartment can rent for around €1,700 a month, earning a yield of 3.7%.

The interest rates have been mostly stable in recent years. Housing loan rates in August 2018 were (Deutsche Bundesbank):

IRF up to 1 year: 2.13%, slightly up from 2.05% a year earlier

IRF 1-5 years: 1.7%, down from 1.89% a year earlier

IRF 5-10 years: 1.71%, slightly up from the previous year’s 1.67%

IRF over 10 years: 1.97%, almost unchanged from the previous year’s 1.98%

London prices are now declining

London and the rest of the UK is the widest it has ever been, both in cash and percentage terms. According to Nationwide, the average London home worth 136% more than the average home elsewhere in the UK (In Q3 2018). The average difference in price is almost £270,000 (US$ 348,421).

The divergence accelerated sharply in the years after the financial and eurozone crises in 2008-2009. In Q3 2018, however, London prices fell by 0.7% y-o-y to an average of £468,544 (US$ 605,406) in comparison to the 2.4% price increase on the broader market, based on the figures from Nationwide. The last year was a tumultuous one for the UK economy, with the pound tumbling, the base rate rising and Brexit looming on the horizon. But even with Brexit on the horizon, Prime Central London is one of the wealthiest areas in the UK. Locating in the center of the capital has the highest property prices in the UK. However, the prices in prime central London have been on a sharp downward trend, with double-digit falls in their value.With that same uncertainty following us into 2019, it’s no wonder homeowners are anxiously watching their property values, while buyers are looking for the right moment to strike.Buy-to-let investors are hemmed in by new regulations and taxes. The owner-occupiers are reconsidering high-risk property moves as interest rates start to rise and mortgage affordability rules remain tight.

Themonth-on-month fluctuations are to be expected, as property tends to be more in demand at some times of the year than others.Looking at the trends over the past few months, a number of experts consider house prices may grow more slowly over the coming year. Property surveyors’ association Rics warns that house prices are unlikely to move at all in 2019, while property consultancy JLL puts growth at just 0.5% for the coming year.

On the other hand, according to Hamptons International, rents in Great Britain are picking up, increasing by 1.6% during the year to September 2018, following a 1% y-o-y rental growth rate in the previous month. Rents in London rose, with a rent increase recorded in Inner London, for the first time in four months.Purchasing homes and renting them out is a great way to produce extra monthly cash flow.

  Sept 2018 Aug 2018 Sept 2017 Sept 2018 y-o-y (%)
Greater London £1,714 £1,702 £1,712 0.1%
East of England £963 £957 £937 2.8%
South East £1,055 £1,052 £1,032 2.2%
South West £814 £807 £795 2.3%
Midlands £690 £689 £674 2.4%
North £650 £648 £637 2.0%
Scotland £660 £658 £655 0.8%
Wales £683 £683 £657 3.9%
Total £980 £975 £965 1.6%
Source: Hamptons International

Ireland’s house price growth is decelerating, as a consequence of the uncertainty regarding the Brexit. Residential property prices increased 5.81% during 2018, a slowdown from y-o-y rises of 11.68% in 2017, 8.97% in 2016, 7.04% in 2015 and 18.27% in 2014.

New dwelling completions surged by 25.4% to 18,072 units in 2018 from a year earlier. Likewise, dwelling permits rose by 8.4% y-o-y to 10,265 units last year.

In 2018, the number of sales in Dublin dropped 1.8% while sales value increased 2.4% over the same period. Dublin apartment costs are around €2,354 per sq. m.

Ireland: Economic growth despite an uncertain outlook

The Irish economy grew by about 6.8% in 2018, after GDP growth of 7.2% in 2017, 5.1% in 2016, 25.5% in 2014 (obviously a statistical artifact), 8.3% in 2014, and 1.1% in 2013, according to the European Commission.

Despite an uncertain economic outlook, many companies are attracted by the country’s very open economy and by its relatively low tax inversion rate of 12.5%.

Lisbon, a constant growth

Property prices in Portugal began to recover in Q4 2014, after 13 consecutive quarters of y-o-y house price declines. Property prices rose by 5.39% during 2018, up from annual increases of 3.03% in 2017, 3.85% in 2016, and 4.06% in 2015 and declines of 0.53% in 2014, 0.68% in 2013, and 6.91% in 2012. The Portuguese housing market is expected to remain buoyant this year, with Moody’s Investors Service predicting house price increases of between 7% and 8% every year until 2020. Yields are profitable in Lisbon, at around 5.45%, and Lisbon apartment costs around €3,830 per sq. m.

Investments with economic approach

Index fund offers a low-cost, diversified approach to bond investing, providing broad exposure to U.S. investment-grade bonds with maturities from one to five years. Reflecting this goal, the fund invests about 30% of assets in corporate bonds and 70% in U.S. government bonds within that maturity range. A key risk of the fund is the fact that changes in interest rates can eventually lead to a decrease in income for the fund. Investors with a short-term savings goal who are willing to accept some price movement may wish to consider this fund.

US short maturity bonds

Information ratio (IR) measures the return of a portfolio adjusted for risk by dividing the portfolio’s excess return versus a benchmark by the tracking error. Information coefficient (IC) is the average correlation between forecasts and outcomes. And breadth (BR) is the number of independent opportunities for investments that offer excess returns over a period. Breadth tends to be related to the dispersion of asset returns.

Two essential themes for investors come out of a discussion of skill and opportunity sets. First, it is crucial to think about your source of edge and to align your organization’s process to serve that end. Second, a big part of winning is finding a game that allows you to show your skill.

Investors can express skill in three ways: market timing, security selection and position sizing. It’s not how often you are right that matters; it’s how much money you make when you’re right versus how much money you lose when you’re wrong.

But all the skill in the world is useless if there is no opportunity. There are a few ways this can happen. First, a skillful participant does not get to play the game, a result of capital or other constraints. Second, the cost to play may be too high due to arbitrage costs. Finally, skill is obscured if the opportunity does not offer differentiated payoffs.

To quantify opportunity, we look at dispersion. Dispersion measures the range of returns for a group of stocks. Generating a return in excess of the benchmark is really hard if the gains or losses in the underlying stocks are all very similar to those of the benchmark. On the other hand, there is a bountiful opportunity to pick the winners, avoid the losers and create a portfolio that meaningfully beats the benchmark if the dispersion of the constituent stocks is high. Research shows that dispersion is a reasonable proxy for breadth and that the results for skillful mutual fund managers are better when dispersion is high.

Tactical positining

These dynamics feed into our near-term outlook for inflation. We expect a modest acceleration in U.S. core CPI to about 2.5% over the next several months as companies increasingly pass on the costs of tariffs to consumers, before tailing off toward 2.2% at the end of 2020. Monetary policy and potential fiscal policy should also bolster inflation expectations. The Fed is still more worried about slowing economic growth than overheating. We think the Fed is unlikely to shift toward another tightening cycle anytime soon, even if the economic data and inflation surprise to the upside.


We expect the U.S. economy to experience a sharp recession in the first half of 2020 as widespread nonessential business closures necessary to slow the spread of COVID-19 curtail U.S. activity with unprecedented speed and severity. Our expectation for a peak-to-trough contraction of around 10% in quarterly GDP (not annualized) is significantly larger than the roughly 4% peak-to-trough decline during the global financial crisis in 2008. However, we also expect the contraction to be shorter, as quarantines are eventually relaxed and monetary and fiscal policy stimulus supports the economy – with a lag. Alongside this sharp contraction, we look for the U.S. unemployment rate to almost reach 20% before moderating back to between 6%–7% by year-end

Forecast for a rebound in the second half of 2020 is based in part on the expected gradual easing of the pandemic and reopening of the economy, but perhaps more importantly on the unprecedented speed and size of U.S. policymakers’ economic response. In addition to cutting the policy rate to zero and restarting large-scale purchases of U.S. Treasuries and mortgage-backed securities (MBS), the Federal Reserve has steadily rolled out programs aimed at reducing financial market stress and maintaining the flow of credit to households and businesses. Congress also worked quickly to pass a record $2.2 trillion dollar stimulus package, which includes 6% of GDP in spending to directly support individuals and businesses. Further fiscal stimulus is likely to be passed in the next few months.

Despite unprecedented efforts by policymakers, we still see clear downside risks to the forecasts. First, uncertainty about the spread of the coronavirus remains high. A second wave of cases or a slower path to reopening the economy would prolong the economic pain. Second, while policymakers have been quick to react to worsening economic conditions, any delays in dispersing funds throughout the economy raise the risk that bankruptcies lead to longer-term economic damage.


What is intriguing, however, is that the correlation between equities and bonds was positive, at 0.4, measured over the same period as the recession, using daily data. How is this possible? Simply put, bonds tended to be above their (positive) trend at the same time equities were above their (negative) trend, and vice versa. If investors had relied only on the correlation measure, they may have erroneously inferred that bonds and equities both performed poorly during the 1970 recession.

nvestors should care less about how the returns of assets deviate from their trends and more about the trends themselves – particularly when we are considering how bonds will perform in an equity market drawdown or in recessionary periods.

stockbonds corellation

With roughly six months to go until the US expansion becomes the longest on record, there has been growing concern that the global economy more broadly is running on late-cycle fumes.Lofty valuations, soaring profit margins, a flattening yield curve and a Federal Reserve tightening in the face of inflationary pressures — especially as the sugar high of fiscal stimulus appears to be wearing off — make an easy narrative. So much so that most analysts are already baking in the next recession.

Global cycles

Investments in China: An opportunity or a bad plan?

With a Gross Domestic Product (GDP) growth of USD 13.45 trillion in 2018, China is the world’s second largest economy after the United States. This country is increasingly playing an influential role in the worldwide economy. Even if China is the global economic leader, some experts have been worried that the country’s high GDP growth could not last. Is China a real opportunity for investment?

1e01ccd1ffcf4ae9d3e8fc4ab6541550 china on site gdp growth graph2 tcm17 14812 639x0

China’s Gross Domestic Product growth in 2017 was 6.9%, led by continued strong public infrastructure investment, robust consumption growth and improving foreign demand. China’s Q1 2018 GDP growth came in at 6.8% YoY. The annual growth target in the 13th Five-Year Plan (2016-2020) has been set at 6.5%.

China consumption

  Chinese equities have all suffered losses in 2018. The three leading indices for Chinese or China-related equities – the Shanghai Stock Exchange Composite Index, Shenzhen Stock Exchange Composite Index and Hang Seng Index slipped 14.7%, 24.1%, and 7.1%, respectively.

Limited impact on China growth

The main reason for this fall has been the US-China trade dispute.

escalating US China trade

A stronger U.S. Dollar has impacted Asian currencies, causing depreciation and driving a significant amount of outflows from the region. However, as a result of the Chinese authorities intervention, RMB’s depreciation trend is expected to be softer.
While there is little doubt of China’s commitment towards deleveraging, the authorities may begin to adopt a more flexible approach as the country’s economic growth moderates.

A new growth model
After fast economic growth in the past three decades, the Chinese government has embraced slower economic growth. This process is called the ‘new normal,’ which not only aims at quantitative but also qualitative and sustainable growth. According to the government, China needs to embrace a new growth model that relies more on services, private consumption, and innovation to drive economic growth.

China industry consolidation

Building an efficient financial system is also crucial to support the real economy. The new economy transformation focuses on supply-side and mixed ownership reform, investment to a consumption growth model, the upgrade in the industry “Made in China 2025”, new sectors (green, technology, TMT, healthcare).

China IT



China, therefore, should rely on productivity improvement, shifting labor from non-productive to productive areas. With strategy initiatives such as industrial upgrading, this endeavor is progressing nicely. As the figure shows, new economy sectors are expanding rapidly and will be an essential pillar of economic growth for years to come.



Why is it better to invest in Asia’s small companies?

With a backdrop of volatility and uncertainty, Asia continues to be one of the few reliable sources of growth today. Investors can capture good profits by investing in Asia’s smaller companies. However, focusing on company growth is not enough for equity investors in this space to make the best returns.

There is a huge number of opportunities for companies to take advantage of Asia’s structural economic growth story, and many investors may capture this exciting return opportunity by investing in Asia’s smaller companies. However, simply focusing on company growth is not enough for equity investors in this space to make the best returns.

Screenshot 1

Asian smaller companies’ shares have historically delivered great returns over time. They have outperformed their larger siblings, and have done this with similar overall volatility or risk. The misconception that small equals risk can be suppressed when we compare the volatility of the respective MSCI benchmarks, which track very closely.
The diverse market means there are as many risks as there are opportunities. A research-intensive approach is essential to ensure that bad apples are avoided. The best apples are picked. There is no easy way to approach this puzzle. It does entail a large dose of sweat and tears.
Despite many intuitively believing a focus on growth is the best approach to investing in Asian smaller companies, history indicates that taking a Value approach to investing in this market significantly outperforms over time. Investors who are focused on quality and growth end to over-pay for these stocks and give up future equity returns. The most important driver of equity returns over time is the price you pay and to avoid overpaying.

A true Value approach can take you away from popular household names and towards those stocks that are ignored and under-appreciated by the market. This is vital to take advantage of mispricing, as we want to exploit behavioral biases of other investors who tend to overpay for growth and underappreciate Value stocks.
To follow this approach requires discipline. It’s better to spend a huge amount of time understanding the companies, the drivers of their earnings, the risks and the rewards and look for a large margin of safety before looking to invest. It’s important to focus on companies that have moats and franchise values that are under-appreciated or those with differentiated propositions of a next-generation business

Screenshot 2It’s better to have a well-diversified portfolio. Portfolio construction is a distinct activity that is built around capturing the best ideas while also looking to diversify risk. As an investor, it’s essential to build a high conviction portfolio of best approaches – benefitting from natural diversification of the portfolio due to high idiosyncratic risk while look for maximum upside potential. Most of the investment opportunities find across Asia currently lies in countries such as China, Hong Kong, Korea, India, and Taiwan.

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Why you should invest in the stock market

Investing in stocks is one of the most profitable ways to build wealth over the long-term. However, it's impossible to guarantee big returns - not even big investors like Warren Buffett can do that. Stocks are an investment that represents part ownership in a corporation and entitles you to part of that corporation's assets and earnings.

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Today, share ownership is usually recorded electronically, and the shares are held in street name by your brokerage firm.
For most people, stock market investing means choosing among these two investment types:

Stock (also called equity) mutual funds or exchange-traded funds. These mutual funds let you purchase small pieces of many different stocks in a single transaction. Index funds and ETFs track an index; for example, a Standard & Poor’s 500 fund replicates that index by buying the stock of the companies in it. When you invest in a fund, you also own small pieces of those companies. You can put several funds together to build a diversified portfolio.ETFs trade throughout the trading day, like stocks, while mutual funds trade only at the end of the day at the net asset value (NAV) price.

Individual stocks  If you’re after a specific company, you can buy a single share or a few shares as a way to dip your toe into the stock-trading waters. Building a diversified portfolio out of many individual stocks is possible, but it takes a significant investment.

Preferred Stock vs. Common Stock
Being a shareholder gives you certain rights and benefits; for example the right to vote on company matters at the Annual General Meeting and the potential benefit of receiving dividend payments.
Shareholders have a claim on the company’s assets in the event of liquidation, but do not own the assets.
Holders of common stock have voting rights at shareholders’ meetings. They also have right to receive dividends if they are declared. Holders of preferred stock don’t have voting rights, but do receive preference in terms of the payment of any dividends over common shareholders. Therefore, preferred stockholders receive a fixed dividend from the company, while common shareholders may or may not receive one, depending on the decisions of the board of directors.

Holders of preferred stock also have a higher claim on company assets than holders of common stock. Holders of preferred stock typically get paid more, and even have a priority claim in case something bad happens, like bankruptcy.
Preferred prices tend to be steadier than regular stocks, thanks to their big dividends. They’re also inconvenient to buy individually, so investors often turn to funds like ETFs and CEFs (closed-end funds) as ways to buy 5%+ paying baskets of preferred shares.
Ownership is determined by the number of shares a person owns relative to the number of outstanding shares.

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Imagine you wanted to start a restaurant with your friends. You decide you need $800,000 to get the business off the ground so you incorporate a new company.
You divide the company into 1,000 shares of stock. You price each new share of stock at $800. If you can sell all of the shares to your friends, you should have the $800,000 you need (1,000 shares x $800 contributed capital per share = $800,000 cash raised for the company).
If the store earned $70,000 after taxes during its first year, each share of stock would be entitled to 1/1,000th of the profit. You'd take $70,000 and divide it by 1,000, resulting in $70 earnings per share (or EPS, as it is often called on Wall Street). You could also call a meeting of the company's Board of Directors and decide whether you should use that money to pay out dividends, expand the company by reinvesting in the retail store, or repurchase some stock.
For example, you may decide you want to sell your shares of the family retailer. At some point, if the company is large enough, you could have an IPO (initial public offering), allowing you to sell your stock on a stock exchange or the over-the-counter market.

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Choose our professional Stocks Services (Daily Signals & Risk Management; Education (LIVE Trading Consulting) and we walk you through reliable trading strategies. We will also provide you with the tools you need to consistently get profit from the stock market. Contact us anytime at This email address is being protected from spambots. You need JavaScript enabled to view it.




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