The New Year (of the Dragon) is Here
My Christmas newsletter looked at what we’d seen in our first 9 months of TBK Capital. In this issue I’d like to examine what this New Year looks like - and the opportunities it presents.
My Christmas newsletter looked at what we’d seen in our first 9 months of TBK Capital - see that issue here. In this issue I’d like to examine what this New Year looks like - and the opportunities it presents.
The financial difficulties the world economies have faced since the onset of the Global Financial Crisis have not gone away. In fact all that’s happened is that the can has been kicked down the road from the investment banks, to the banks, to the governments. Now the can has reached the end of a dead end street and there’s nowhere else to go but turn around.
At the time of writing – yes things do change amazingly fast – in a global sense:
- The U.S. economy does look like it’s in recovery mode.
- The European economies are in a real mess.
- Asia looks OK with China still growing (if slightly slower than the previous frantic pace).
The problem is of course governments have to be elected to do anything. And even if they had the solution – and I’m not suggesting they do – the policies proposed are certainly not going to be popular.
The key issue everywhere in the Western World is the level of debt in the economies and the pain that has to be endured as the various governments attempt to unwind it.
For those of you interested in an economist’s (rather pessimistic) view of the U.S. situation and outlook, read here. John Maudlin’s newsletter which includes the “Quarterly Review and Outlook” from Hoisington Investment Management - an Austin, Texas based firm that specialises in fixed-income portfolios for large institutional clients.
And to understand (in layman’s terms) the major problems governments in Europe face - and the difficulties the individual countries have in solving them - read another of John’s newsletters here.
So what’s it like here?
I was pleased to read Mark Lister’s article in last Saturday’s Herald. Mark is head of private wealth research at Craig and Partners, and his view of the year going forward is very similar to mine, being (my summary):
- The U.S. is in better shape than Europe.
- The high cost of Greece and similar economies exiting the Eurozone, make that event unlikely.
- China will avert a “hard landing” which is of particular interest to Australasia.
- Sharemarkets will have a positive year as good companies deliver high dividend yields and investors (rightly in my view) pay more attention to dividend yields than PE growth.
- Interest rates will remain low
- The New Zealand dollar will remain strong.
- Bonds will remain a safe choice with conservative investors but don’t expect a further fall in interest rates to give the high returns of the last year or so.
- Obama will be re-elected President of the U.S. (because the Republican’s have no sensible alternative).
- Government asset sales here will give our sharemarket a boost.
- Official inflation figures remain at low levels, but, as Mark says, and I’m sure we all agree, “inflation statistics underestimate the real cost of living. All the necessities (food, electricity and rent) keep rising and the only things getting cheaper are the things we don’t need (like TV’s).”
To read Mark’s article click here.
I’m firmly of the belief that New Zealand and Australia are great places to be living, especially over the next year or so, and with China’s importance to us growing. See end of my last newsletter here and Tony Alexander’s comment below.
With the bad weather in Auckland over the holidays I didn’t go away to the beach (and actually had a great time with many friends of the same view) and was back in the office early. It was interesting to talk to many people then who were surprised how positively the business year had started for them. These included people in advertising, architecture, and residential real estate with an agent (I know rather well) signing up the sale of a Remuera house on New Year’s Day!
The residential real estate market is the bellwether for the New Zealand economy and this continues to improve especially in Auckland, which in itself is a key indicator. The latest REINZ report shows the best sales in December with the price index is back to an all time high. To read the interest.co.nz report click here.
With residential consents and subdivisions well down from the recent heydays, Auckland and Christchurch (for obvious different reasons) in particular are seeing a shortage of housing.
The housing shortage was predicted in 2011 and last August QBE LMI New Zealand Residential Property Outlook predicted that, notwithstanding the current uncertainty in global markets, prices could grow by up to 6% per cent nationally over the coming year. See article here.
Just recently Property Magic predicted that insufficient properties to choose from and increased interest from buyers, means that sellers are going to continue to enjoy a market which favours them. See article here.
And in Tony Alexander’s latest Weekly Overview, quoted below, under Housing Market Update, he says “New Zealand’s residential real estate market is slowing improving driven by a shortage of listings and lowest construction in 40 years encouraging buyers with foresight to get in before a stronger labour market brings a wave of buyers in”.
Of course increased demand for housing is a double edged sword. It’s better for house owners and landlords than tenants. The Sunday Times article yesterday claimed rents in Auckland and Wellington have increased by more than three times the national average in the last three years. They report rents in fashionable suburbs of Auckland like Grey Lynn and Westmere are up 14% and in traditionally affordable areas such as Te Atatu up 11%. Read the article here.
Year of the Dragon
The new Chinese Year of the Dragon, which starts today the 23rd of January, is the Water Dragon, and of all the Dragon years 2012 is most likely to bestow the Chinese Five Blessings of harmony, virtue, riches, fulfilment and longevity.
And, according to one of the many predictions you can read, if you subscribe to the dawn-of-a-new-era theory of 2012, then it’s easy to see how the influence of the Water Dragon will increase the likelihood of success for progressive movements gaining momentum all across the globe. Energy conservation and green energy-producing technologies, curtailing Global Warming, challenges to multinational corporations, attention to world hunger and the renewed health of the oceans and sea creatures will all likely fare well.
BNZ economist Tony Alexander, writing his recent Weekly Overview from Hong Kong, has a more economic view that I can relate to – our future trade with China. Explaining why he is in Hong Kong Tony says it’s because China is New Zealand’s blind spot.
“Since the Free Trade Agreement between ourselves and China came into force in October 2008 our trade with China (including Hong Kong Special Administrative Region) has grown in total by about 120%. (Or 151% for the mainland only. China mainland’s total imports from all countries have grown 43%.) That means China now accounts for 14% of our export receipts from 7% three years ago and around 2% back in 1990. At the current pace of change China will surpass Australia to become our main export destination in maybe 2017,” he said.
He notes China may surpass the United States as the world’s largest economy on a purchasing power parity basis. If so it would regain the position it had in the early1800s when it accounted for 25% - 33% of world GDP. China’s growth is quite spectacular moving from less than 2% of world GDP in the 1970s to just over 13% now.
He goes on to say “On the face of it one might think that this huge surge in the money we are making from China’s growth is great and as long as we keep doing what we have been doing everything will be okay. But that way of thinking is the very problem. Over 96% of the things we export to China are primary products and growth in those receipts has been about 126%. But growth in receipts of non-primary exports has been only 9%. We are exporting low value-added products to a country whose consumers are experiencing rapidly rising incomes and demanding increasingly sophisticated goods and services akin to those Western households consume.
“All we have achieved so far is to shift some of our dependency on low value-added primary sector exports from one set of countries to another. Now one might think that riding a commodity boom can be a fine thing for one’s growth. Yet in the year to September our economy recorded growth of only 0.1% if one takes away additions to inventories. The
unemployment rate has been stuck near 6.5% for two years, wages growth is minimal, and there are record outflows of people seeking their fortunes in Australia.
“Don’t underestimate what the outflows are telling us. Between 1975 and 1982 rising discontent with an increasingly regulated economy saw a net 156,000 people leave our shores. There is a message in the sound of feet walking away from our long white cloud. Something is not right here.” To read his 19 January issue click here.
Now there’s something to think about – and act upon. Fortunately at TBK Capital we’re finally starting to see:
- Developers - and more importantly financiers - taking interest in meeting the demand for housing.
- More and more requests for funds to start or expand businesses that add value here and have potential or existing export markets.
And this is where we see the potential for private investment. Just like my friends mentioned above - who have seen a positive start to the year - we’ve also started well. We now have to update and add to the Projects listed on our website. The Carbon Credits offer to forestry owners is closing early, the Zoono loan offer has been filled, and we have new ones in the pipeline. So watch this space.
Maybe in the end, here in New Zealand, 2012 will be different from recent years because everybody’s feeling sick and tired of feeling sick and tired.
Here’s to a Happy New Year – Dragon or not.
Cheers
JP
John Paine
TBK Capital Limited
Level 15, BDO Building
120 Albert Street
Auckland 1010, New Zealand
Phone +64 9 307 3257
Fax +64 9 309 4519
Mobile +64 21 902 901
Email john.paine@tbkcapital.co.nz
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