Not what it seems?

Housing, China and Big Tech – all are regarded as ‘un-investable’ - ending last year the above three sectors were all under a cloud, but one broke free, why?


Plus, Powell scares the market by thinking too loudly.




Well let’s start with housing. UK residential property prices are holding up fairly well given the magnitude of rate rises, while UK housebuilder share prices look fairly awful. There is a confusing mix of income and capital issues to examine.


Housing itself holds up well – many reasons: demand of course, high levels of employment, heavy net migration and the normal new household formation provide a base demand level well above new build levels. At a time when it is unattractive to fund speculative new build (so units not pre-sold before commencement) because of finance charges, and with a planning system that is both over prescriptive and under resourced, supply will stay slow.


So, the logic of fairly steady prices for existing housing stock holds, buyers will need more cash, but with (in real terms) falling house prices, that can be done. It moves funds from (largely UK) borrowers to (largely UK) savers, but leaves total disposal income in the country (after HMRC takes a cut) largely unaltered.


While rising rentals, reflecting pent up demand and the pressure on debt funded landlords, adds to new build demand and provokes more supply at the institutional level, at least. So, we don’t see a price crash (however desirable in some areas) at these levels.


So why then are housebuilders so disliked? Sales of houses will indeed slow, so reducing dividend cover, but the core business itself is fine and the capital value holds steady, albeit discounted by more.



China? Here we have almost the same issue, fundamentally sound, but politically hard to justify investment. That taint spreads to companies that sell into China too. It is very hard to ignore this vast market, and the undoubted speed of innovation and high productivity of a command economy. When so many other places fall back, China is tempting.

China has the size, finance skills and levers to deliberately act counter-cyclically, stepping out of sync with the global economy. So (on that narrative) it has ducked the blight of post COVID reopening inflation, by a deliberately slow exit, stockpiling commodities, and then stepping out of the market to defuse price spikes.

Arguably even with foreign capital, it was happy to load up when it was cheap with few restrictions, on both equity and debt, but equally happy to step back when prices and restrictions start to apply. Choice or circumstance? In an opaque system who really knows. . . But a China slowdown is not the same in type or duration as a free market one.

Like housebuilders it remains uninvestable, but for all that, there is value.



So, to the third of the trinity, large cap tech. These are all US based, highly profitable, with not a lot of debt, but typically appear overvalued. In the old free money days, fast growing tech was enough, so the layer just below, also profitable, simply fed off the reflected glory of the mega caps, and so on all the way down to the start-ups and chronic loss makers. That link has broken, values are now about both size and sector. This is odd. Normally if you broke (say) Microsoft into ten equal parts the total value would go up. This year suggests it would now fall.

So, what are investors doing, if they are ignoring fundamentals? It seems the cash generating highly liquid stocks do enjoy excess market demand in tough times. Some of it is momentum following, some is a falling share count, but mainly it seems investors just really like the name recognition and deep liquidity, to trade the market.

From this website.

If so, it may be dangerous to write this group off. In a market going sideways they provide the price action, and it seems they are so big, so well entrenched and global, that the typical stock specific risk can almost be ignored. You need to be nimble; they fell hard in 2022, but their dominant recovery this year, providing nearly all of global equity performance might be the true reversion to the mean, rather than their sudden collapse when everything was being sold off last year. But that process does guarantee future volatility for them too, and history suggests it will not last.




We have nothing to add on what seems a be a new set of forever wars, beyond sadness and dismay. While whoever wins the 2024 elections on either side of the Atlantic, will be forced to do an “Erdogan turn”, or 360 spin. This could happen fairly soon after the polls close.




The markets seem not to like Jerome Powell’s musings on the vast range of things he does not know, at The Economic Club in New York this week. Does his calendar suddenly show his exit date, albeit over two years away? You could almost hear the soft polish of his resume to concede errors and some failed guesses. He even, twice, called US fiscal policy “unsustainable” although he was careful to say that was not now, but only in the future (after he’s left office that is.)


But the long run neutral rate? No idea. The Philipps Curve? No idea. Interest rate transmission rates? No idea. That’s not new, though - it is pretty much what “Data Dependent” always has meant, and markets were previously fine with that.


We will know soon enough, if rates are still rising globally. It certainly makes markets jittery, especially on Friday afternoons.





A picture of a set of buildings, with the wish 'happy new year'

All Clear? REITs and Private Equity

When do we go back to property (REITs) and private equity (PE)? We look closely at these two areas, as there appears to be nothing new to see or say on interest rates or inflation.

Macro is dull just now

Neither the Fed nor the Bank of England, nor indeed the ECB meet this month. So, the default is to assume a half point rise all round. Which should mean Western central banks are broadly aligned for a while, so by implication are currencies.

Clipped from this site – downloadable from source.

Recessions lag rate rises, so are not due yet either, although clearly one is coming.

Inflation will probably drift lower, but the employment markets stay strong, as the shuddering readjustment out of COVID continues to keep churn elevated. In person service hires roughly balance stay-at-home sector losses for now.

Basic food commodities, which have driven much of the recent inflation surge, will stay elevated until the current crops/stock are harvested and replanted late in the spring. Energy is possibly oversupplied for this winter. So not that much change in those two inflation drivers yet. 


So, when is it safe to go back into risky assets? We look at two contrasting stories, firstly REITS which are seen as bond proxies, so cannot properly bounce until rates top out. This seems to need a couple of months at “no change” from the Central Banks. We are less sure about quantitative tightening ending, but most of the market gets spooked by that too. We think it matters little, because masses of global liquidity make what US banks hold somewhat irrelevant.

Nor do we see why REIT assets held on 7–8-year leases with typical debt fixed for half that term, should oscillate so violently over a few months, but that’s life, they just do.

Does property matter?

Institutional interest is not high, we know that, and most institutions need daily liquidity before all else, which lumpy property can’t give. Plus, for boring old REITS a lot has changed for the worse.

Who knows where retail space settles? It remains over supplied (and overtaxed), likewise probably office space, with the added wrinkle of retrofitting for carbon neutrality. COVID created an excess of new storage and warehousing, which also needs to be worked through, so that’s not safe either. While no institution wants the grief (or bad publicity) of dealing with individual tenants and homeowners, so we have long thought if you want to play the residential market, buy high street banks, as a  kind of proxy. Mortgage lending is about all they do now.

It is private investors who still love property as a tangible asset; most are over invested in property and have been over rewarded for being so. Habit really. But if they had that habit before, they are still keen to know when to step back in, at bargain basement prices.

Private equity

Now PE, is a bit different. Yes, private investors like it (like hedge funds) but trust it about as much. Never sure why you would buy a car with just an accelerator pedal, and only forward gear, but most investors buy just that: no shorting, long only for ever. Must be nice to have a mind wedded to constantly rising prices (which long only implies).

PE is just that, so you are buying for management endlessly improving, but adding into the mix a belief in high gearing. You also believe that the managers will constantly be selling and buying investments at a profit. So, you must endlessly mark up your stock, to shift it too.

Can it really work like that?

Markets do not agree.

So, while there are many eye-wateringly deep discounts in PE, markets expect debt to blow a few things up and prices to sell stock to be cut back hard. With some reason, big banks have a shed-load of deal related debt stuck on their balance sheets, probably a fair bit of equity too, and no one is underwriting an IPO, if there is a scintilla of risk left involved. So, unless it is marked down, we have a stand-off, a buyers’ strike.

And in tech, the flaky stuff (AIM etc) is back down below pre-COVID levels, and possibly still falling, which is logical. The better stuff, but with an FX impact, bottomed out a while back, possibly in June? The big “portfolio” quoted holders did so in October, when discounts maxed out around 50% and the FX (i.e., dollar) tailwind was keeping asset values rising.

NASDAQ - a proxy for private equity

However, the NASDAQ hit a new low on 28th December, and that looks much less like a clear bottom, more a long base from October. It is a tough call; NASDAQ multiples drive PE valuations, so that is not helping. Investments with three year’s money a year ago, now have two year’s cash and judging by the speed of layoffs, know that when that drops to one year, funding lines either dry up, or get super pricey. And I don’t see FX helping much this year.

So yes, massive discounts, but also yes, huge lags and the normal discount implied for firms that mark their own homework  on the valuation side.  Audit firms may also be growing more supine (or getting sacked if they ask the real questions).

So, on a five-year view the sector is fine, even cheap, but on a five month or five-day view?  The jury is still out.

While the PE sector is still looking better than REITS in terms of recent prices, it is still, in our view, the one that has yet to base out. If the reason for revival is a flourishing IPO market, that feels more like three years away; by contrast the stability in interest rates that REITs need will probably arrive this year.

So, we stay in touch with both areas, but by no means all in - not just yet anyway. But nor given the performance and yield they give, can they be ignored for ever.      

Welcome to 2023.

Charles Gillams


In-house collage - after a status quo song, and the work of LS Lowry

I noted at the end of our last bulletin, that markets are feeling strangely bullish, for a few reasons, which I share. Although only in some places. I still find little attractive in most debt markets. They are cheap, but given losses this year, are they good value?

And UK politics is becoming boring, which is no bad thing.

So, were we right to predict that interest rates alone cannot tame inflation?

Our original thesis for this year, that interest rates could not tame inflation alone, maybe is right. The level needed would cause too much damage. But that is applicable (we now see) to the UK, but not as yet to the US. And oddly perhaps not as yet to the EU either, although Lagarde midweek, perhaps had the same tilt. But German profligacy may wreck that.

The logic is the same for them all. You can’t tame this beast by rate rises alone, as double figure inflation needs double figure interest rates and that is just not happening.

The UK is certainly not prepared for that level of rates and fiscal restraint is therefore now required. Fiscal drag will do some of the heavy lifting, and energy price declines a fair bit more.

Some commodity market statistics were  released by the World Bank, this quarter. The above graph is extracted from their statistical report

But tax rises and government spending cuts will still be needed to cool the UK labour market. In particular the public sector must be reined in, or service cuts made.

Earnings will fall, taxes rise, growth stall, discontent rise. But still no collapse in housing (secondary) markets or in employment.

Nor do I therefore see much rise in loan defaults. This makes the recent round of forward-looking bank provisions unusually daft. You can’t audit the future, so how can you include it in historic accounts? A weird hybrid. Best to ignore all that and focus on now, and now is still not terrible. With a pretty hefty valuation discount in situ.

(Data downloaded from the Office of National Statistics for this in house graph).

The US political situation

In the US, The Federal Reserve have effectively said if there is no fiscal restraint, they will ramp up rates till there is, or inflation falls. That is scary, but it looks as if the Mid Terms will hobble Biden and stop some of his fiscally reckless measures. He thought the wave that toppled Kwasi missed him, but it was the same ocean, and likely will give him a rough ride too.

Biden’s approach felt good, overindulgence often does, but the pain of the untethered dollar is now starting to hurt US earnings, and in time US jobs, however much they dream of legislating against that. The impact of rate rises is also probably less than it sounds in the media, partly because most reporters are likely to have mortgages, whereas a growing number of investors don’t.

Overall US government policy remains to force up inflation and challenge the Fed to sort it out. Hence all the Fed threats are directed not at the market (which cares) but at The White House (that does not). Mid Terms (on the current path) will therefore be a big boost to US markets, as it means Congress at least, will start to work with, not against the Fed. As with Kwasi, a reckless budget will not pass unchallenged again this time. Those extremes belong to the COVID era, that is now over.

Comparison with the UK position – and where Europe maybe is headed

With that battle already won in the UK, both sterling and to a degree UK rates are reverting to the status quo ante. And as sterling rises so the FTSE falls; that link also remains. If the UK is neither chasing interest rates up, nor letting the pound fall, it gives Europe some cover to do likewise.

In truth although sounding dramatic, in the real world it is inflation that really counts not (as yet) interest rates which are still absurdly low.

The Tory Party – what can we discern?

Talking of status quo, that’s where the Tory party is now headed. Cameron drifted too far left, Boris dithered, Truss drifted right, and now the new government is a hybrid, although colloquial English perhaps has a stronger word for it.

I sense that spending decisions may correctly be back with a powerful Chancellor. There is a seeming party truce till the next election, when half the current Cabinet seats will vanish anyway, and then who knows?

Or if this coup and enforced hybridisation fails, we really will know the party is split, and a General Election could follow. Unlikely, though.

Why bullish then?

US earnings except for highly indebted outfits, will probably stay surprisingly strong for a while yet. And likewise, the dollar pivot point is being pushed further out, as no one else in the developed world is going for rates quite that high (or that fast).

There are also two market forces to look out for, rising rates and slowing growth is one, but the simultaneous loss of liquidity is another. The former will cause a patchwork of changes, both good and bad, but the latter the ending of a multi-year bubble.

It all remains cyclical – a transition, not a bounce

The difference is key, rates are possibly a two-year cycle, a bubble a ten-year one. The bubble in non-revenue companies, and in absurd multiples for even profitable tech, will take longer to deflate, be slower to re-inflate and be muddied further by all that spare capital accelerating technological change. This is still not an area we either feel confident in, or trust their valuations.  

If we really are back to the status quo in the UK, about to be in the US, why would markets be going down, down, deeper and down?

a cartoon of a startled bear, with a dog rushing towards it happily, and a bowl of food in between these two


International interest rates - what a dog’s dinner! But perhaps also a wake-up call: this is real life - governing for your social media feed does not work. We take a glance, too at the property market.


Our view has long been that we need rates at 5% to make a dent in labour inflation, both in the UK and US. It looks like the Fed (to our surprise) finally agreed. But with that comes a risk of overshoot, driven by the timing of the US mid-term elections. Powell, perhaps rather more attuned to politics than his banker colleagues, was keen to drop the bombshell early, rather than on 2nd November, right on top of the mid-term elections. So, I think the Fed’s now done with giant rises. Future rises may be less and spaced out, and quite possibly not that many.

One of the most chilling sections in Powell’s press conference was when asked about the global implications: yes, he assured us, he quite often takes tea with international colleagues. That was it. This time round the US is happy to crash through the global economy without a care in the world.

Encouraging short sellers

It seems Bailey of the Bank failed to get the memo, because oblivious to the soaring dollar, he stuck to plodding domestic rate rises, as if Leviathan was not bursting forth from the deep. Lifting rates by 0.5% when the dollar lifted 0.75% the day before felt like a joke. And if Bailey could not see that, the markets could: UK two-year gilts abruptly repriced to US rates.  

But sterling is still hobbled by UK rates at 2.25% - too low. By trying to be clever on the rate rise, Bailey has simply let the short sellers in. As the chart below shows, having already hit the renminbi and the yen, it was obvious who was next. Sterling is a small but liquid currency block, with no allies – so it typically pays more to borrow. The markets just needed the signal.

From : this site’s fine moving graphs

I doubt all that volatility really makes much difference to the real economy. Indeed, the Bank has now braced sterling nicely. As for the pension schemes, the FCA (Bailey’s last top job) created the foible of pensions being forced to hold loads of so called “risk free” assets to prop up UK government borrowing. A most amusing idea, always going to blow up one day.

Not that sure even 4.5% rates will slow wage inflation up. But we will know soon enough, after all the destination was to us never in doubt, just the arrival time. I still see the strain of rates rising to (say) 8% as too much for the electorate in either the US (the leader) or the UK (who follow).

Recession fears?

Nor do I consider either the US or UK end rates to be high enough to cause a severe recession, although clearly, they will have an impact on asset prices, and in the end, labour markets.

So, I conclude this is more a market event than an economic one. And surprisingly it is all in bonds (and therefore currencies).

Investors will hang back until they see those settle down and that could take the rest of the year. So, although everything is perhaps cheap, the VIX will keep many on the side-lines.

The UK at least feels at bargain levels, but buying dollar stocks still feels somewhat pricey.


So, to property.  Well, we got this one wrong. Partly we failed to see Ukraine becoming a big war, but one with no quick winner. This triggered European (in particular) energy inflation. Partly we therefore saw interest rate rises staying in single figures, which is not what some REIT prices imply.

Not that we have changed our longer term “4&4” view on interest rates and inflation, (so higher for longer) but other investors and markets clearly have. You can’t fight the tape.

In general, outside the warehouse sector, real estate companies (unlike say Private Equity) had already taken the hit to values, their balance sheets showed the new world, backed by real deals. So, adding a second discount does seem odd.

Gearing levels are not high, and debt maturities well extended, and interest (still) well covered. Maybe private markets are worse, but it is not clear why that contagion spreads into quoted ones. If there is a blow up, it is not obviously in public markets or mainstream lending.

But if quoted markets are right, what of residential markets?

Well logically as they are still going up, do residential prices now have a big drop built in, which is yet to happen? The price of mortgage banks, home builders and builders’ merchants all say ‘yes’. But how will it happen? It is not a big sector in UK public markets, but the odd couple that do exist (Mountview, Grainger) have also taken a hammering. They have some debt and are rental specialists (of various types).

So, markets say yes, house prices will also collapse.      

Do I believe that? Anymore than talk of imminent dollar sterling parity and 8% base rates? Frankly no. Stagnate, chop around, go sideways, blow the froth off. Sure. Collapse; is wishful thinking.

After Armageddon I fully expect to see a plucky estate agent emerge from the ruins, justifying an offer above the asking price for the debris, with potential (but may need planning consents).

So, if true, that means despite a hair-raising ride, those mortgage banks and residential owners will in time emerge resilient.

Sadly, for many, that also suggests, without forced sellers from the buy to let market (where there will be a few), the stock of housing units won’t change and therefore nor will rents. Housing stock is very lagged and current moves will only close the pipeline two years out. Only mass unemployment hits rents, and if this is a market event, not an economic one, it won’t change, because structural unemployment is not the issue. Indeed, we are at record low unemployment levels.

In summary

A market tremor created in Washington, was transmitted to the UK, and is now rippling round the world; either currencies hold their interest rate differential with the dollar, or get crushed.

Old news; it is odd isn’t it, how so many clever people failed to read the memo?