db140weekender

Macro

    US housing - Through political clouds stretching across Washington this week, optimists saw sunshine in the form of the latest US house building sentiment which returned to its pre-crisis highs. Indeed, with new home sales still 60 per cent below 2005 levels, some see only blue skies ahead. Is the outlook so bright? Starts move with household formation, which is running at around 1.2m annually. But remember that a quarter of starts replace homes lost to fire or storms, old-age or changing fashions. Vacancy rates have also fallen from 14.5 per cent in 2010 to 12.7 today - that is 250,000 housing units a year that did not need building. When vacancy rates bottom at about 12 per cent, starts should rise to about 1.4 to 1.5m to meet demand. That would be pleasant enough. Perfect weather, though, requires millennials to have more babies.

    Strategy

    Europe en marche - The latest Barron’s cover says “Buy Europe” ahead of US stocks. If true, here are some facts to guide you through what lies ahead. First, enjoy the moment because serious European outperformance is rare, with only four instances in the past 25 years when the Stoxx 600 beat the S&P 500 by more than 20 per cent. Second, it will happen fast. Those periods lasted less than two years on average. Third, expect a weak euro; the currency’s trade weighted index lost ten percent on average. Fourth, the fun ends with a crisis. Those previous European rallies were halted by the 1994 bond market crash, 1998 Russian default, 2000 dot.com collapse and the 2007 market peak. Finally, remember that US stocks also do well, gaining 30 per cent on average. That even puts Barron’s “Dow 30,000“ January cover within reach.

    Stocks

    Amazon at 20 - Those swooning over Amazon’s 50,000 per cent return since its IPO two decades ago should remember it was not always easy. Buying shares on any given day since had a one-fifth chance of making a loss over three years. And it took guts to hold on when rival Walmart offered tangible profits and dividends. Yet the latter is now the one scrambling to catch up, as results this week showed. Despite a two-thirds increase, Walmart’s online sales generated just three per cent of its revenues. At least the e-commerce market is growing fast enough to share with Amazon. US online sales jumped 12 per cent in April, the highest annual rate in a decade. So even if growth at Walmart’s new Jet.com subsidiary halves to 50 per cent, e-commerce will still provide half of overall sales growth in three years.

    Finance

    State-owned banks - Two governments cut their bank holdings this week. British taxpayers recorded a ￡900m profit on the bail-out of Lloyds during the crisis. Meanwhile, Singapore’s investment fund, GIC, announced the offloading of half its five per cent stake in UBS. Many cheered the sales. Indeed, an IMF post from 2014 noted that European state-owned banks held one-tenth of Europe’s banking assets, a higher level than in Africa. However the same authors in a World Bank presentation admitted that banks in public ownership are only harmful when national institutions are weak. Even though state-owned banks crowd out private ones - a one percentage point increase in the share of banking assets owned by the government is associated with a 0.5 percentage point decrease in the share of private sector credit - they are likelier to finance projects with positive externalities and provide countercyclical lending.

    Digestif

    Political times - Brazil entered the growing club of countries with embattled presidents yesterday with a 15 per cent fall in the dollar value of its stock market. With both Brazil and South Korea impeaching presidents last year and South Africa and Turkey still tetchy, it seems we live in political times. Indeed, incumbent leaders of the 11 developing countries in the G20 have been in power only four years on average. Advanced economy leaders have faced even more churn with half of them still awaiting their first anniversary. Longevity in political office matters for delivering meaningful change. Take Europe, for instance, where recent elections raised hopes of fundamental reforms. Excited investors should remember the 1992 Maastricht treaty was signed by European governments occupying office for a decade on average. Today’s European office bearers, however, have only half as much experience in power.