Churchouse Letter
April 2013             by Peter Churchouse

Asia’s Problem That the West Would Like to Have

Inside This Issue:
China, Hong Kong and Singapore Governments continue to introduce cooling measures to tame rising hard asset prices. Many regional developer stocks look cheap.
A visit to a micro-cap gold mining company, view to a punt?
Recent property purchases for our own portfolio: Auckland and London.
France’s property market: solid performance in recent years but beware the taxman!
Portwood Portfolio: a solid month, year-to-date Equities review, and adding more exposure to global consumer staples.

Asia has a problem that the US and most of Western (and Southern) Europe would like to have. Monetary policy in the western world has generated an unbalanced global economy, aided and abetted to some extent by emerging market monetary and fiscal policies. Easy money has failed, at least so far, to lift investment, lending and hard asset prices in most western economies, but it certainly has done so in many emerging markets and Asian markets in particular. Western policy focuses on an end to asset deflation, while policy in many Asian countries is trying to tame asset the price inflation that has sprung from easy liquidity and tight supply conditions in real estate markets.

The West is using monetary policy to stimulate asset price inflation and investment. Those same policies have stoked asset bubble fears in Asia.

Deleveraging is the name of the game in the West, while Asian countries are leveraging up again at a pace that harks back to the period leading up to the Asian financial crisis of the late 1990's. Much of that new lending is directed towards real estate. (See AHA Report, February, 2013)

Like the rest of the world, Asian asset markets, including property markets fell sharply in the immediate aftermath of the 2008 collapse of Lehman Brothers. No one was spared. But for most Asian property markets the declines were short lived, though in some cases quite steep. The massive monetary easing in the US was matched by most Asian governments and central banks desperate to avoid the fallout of the near collapse of the US financial system.

Correcting asset price increases is the name of the game in many parts of Asia.

But unlike in the West, Asian asset markets, particularly property markets bounced quickly from their falls, with most moving to the upside by the second half of 2009. Since then most have continued to move higher, with Singapore, China and Hong Kong property markets setting a cracking pace, particularly in the residential sector. Very quickly, Asian central banks and governments moved from aggressive easing to taking evasive action to avoid the possibility of property bubbles. The recognition that it was a property bubble and lending excesses that drove the US into its worst financial crisis since the 1930's certainly shaped policy setting in Asia in response to the surge in property prices.

Aggressive property cooling initiatives now characterise China, Hong Kong and Singapore asset markets.

Most of the more developed economies in Asia, as well as China, have enacted various degrees of measures aimed at cooling heated property markets. China has been the leader with virtually dozens of policy initiatives at all levels aimed at curbing a rampant property market. Hong Kong, with its currency pegged to the US dollar, and therefore with its interest rates tied to whatever Mr. Bernanke deems desirable for the US, has seen fit to introduce a slew of property cooling initiatives starting from October 2009. Singapore's residential property market has delivered a pace of appreciation not too dissimilar from that of Hong Kong and this has been met with a rash of cooling measures almost as aggressive as those introduced in Hong Kong. (See figures 4-6 for summaries of main property cooling measures).


Markets at the Mercy of Policy Makers.

As a result, risks for investors in the real estate space, both in bricks and mortar or via public markets, has moved away from traditional supply demand dynamics to reading the policy tea leaves. Markets are at the mercy of government and central bank policy machinations like at no time that I can remember in the past 30 plus years....

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