12 September, 2013
In this edition of Global View we look back to our March newsletter “ An evolving recovery- How Global can add value” ! and review progress/ results / developments etc over the last five months both worldwide and local on the various , and divergent stages, of the economies of the key players within the evolving world recovery cycle with particular comment on our own NZ situation and that of our main trading partners.
We also look ahead positively to projected outcomes, and possible impediments, obstacles etc that may effect a number of the key elements relevant to the economic cycles over the months and years ahead. As regards our above title lets go with “ Meat Loaf ”click here as we plumb for “ two out of three ” NZ firsts, as the sun and the OCR will come up, with “ Aotearoa ” to provide that big bonus “ cup ” draw to further stimulate our economy let alone our Kiwi pride ?
To date the 2013 global growth projections have remained subdued at slightly above 3%, the same as in 2012 and less than forcast in the April 2013 World Economic Outlook with widespread world unemployment still the major negative factor. Whilst old risks still remain, new risks have emerged in recent months including a more protracted recession in the euro area and a longer growth slowdown in emerging market economies, both likely to be further effected by tighter financial conditions resulting from the anticipated unwinding of QE ( quantitative easing ) stimulus in the United States and Japan as covered extensively in my March newsletter
QE is currently being practised on a large scale in the USA, UK, Europe and Japan, originally commencing in the USA in 2009 and subsequently progressively elsewhere, most recently starting in Japan in early April 2013. The central banks concerned create and purchase their own bonds and in conjunction with interest rates being held at record low levels hope to encourage investors to invest in more riskier assets such as shares and currencies, including the NZ dollar, and for consumers to spend, invest in housing, new cars etc, and businesses to also hire and invest etc, consequently stimulating economic growth, with an ultimate longer term outcome / target being the reduction in high unemployment rates.
In recent months, aided in part by the effects of the various Q.E. policies, we have seen momentum in the global economy shifting to the traditional developed world, away from the emerging economies that had led growth since the GFC begun. For the first time since mid-2007, the advanced economies, including Japan, the U.S. and Europe together are contributing more to growth in the $74 trillion global economy than the emerging BRIC nations including Brazil, India and China.
Forces driving this shift include a resurgent Japan, steady ,albeit tepid growth in the U.S. economy and, at last, Europe, led by Germany and France finally showing signs of expansion after 18 months of contraction, albeit remaining very diverse and fragile. At the same time the big gun BRIC nations are ailing or ratcheting back from their stellar performance of recent years .
There is no one reason why the emerging economies are suffering. Slower consumer demand for foreign goods, more domestic energy production and lower labour costs in the U.S. have contributed. China’s slowdown coupled with its waning appetite for minerals is another and in India’s case just plain economic mismanagement being another, with all of the major emerging countries economies being generally over leveraged having previously led world growth through the GFC period.
This slow down and subsequent weakening in the emerging markets and the associated economic troubles is encouraging investors world wide to divert billions of dollars out of these regions in favour of evolving recoveries in the U.S. and Europe, whilst at the same time causing them to raise borrowing costs to try to aid their currencies as the prospect of reduced or curtailed monetary stimulus, from those countries involved, curbs demand for assets in the developing nations.
With the U.S. ,the first to begin tapering Q.E., at an estimated $10b per month, world financial leaders believe it is critical for the FED to keep interest rates at historical lows longer than forecast to avoid further disruption to the BRIC nations economies and other highly leveraged Asian economies including Indonesia, Thailand and the still struggling larger countries in Europe with mountains of public debt and record unemployment such as Spain, Italy and Greece, the latter having already received two bailouts totalling about 240b euros with a debate about a third intensifying.
As expected, anticipation of this process starting, at an as yet to be determined pace and time span, has already depressed share markets from Jakarta to Mumbai to New York, pushed US 30 year home mortgage rates higher as well as the yield on the benchmark 10-year Treasury note, causing the US dollar to rise as well as heightening the flow of investor funds from the emerging markets, as mentioned above, none more so than in India with the rupee hitting an all-time low and its growth rate also haven fallen to its lowest level in 10 years. Here in NZ with the demand for our currency waning, as an example of the numerous expected world-wide flow on effects, our NZ dollar has fallen further as the US dollar strengthens.
As both the U.S. and the UK begin transitions away from Q.E. they are moving towards a policy of “ forward guidance “ ”, or announcements on short -term interest rate policies, in conjunction with targeted reduced unemployment rates, as their primary monetary easing tools. Success here will depend on a tricky balancing act to tread lightly in terms of increasing interest rates or even more importantly convincing investors that they will remain on hold for longer periods, to ensure they do not unduly spook world investors whilst at the same time control inflationary threats and stimulate real economic growth going forward. Apart from perhaps Australia, interest rate cuts may now be a thing of the past for the larger traditional advanced economies.
The current state of our own economy and the divergent stages of those that materially effect us the most.
U.S. Tapering- When, if, maybe ?
In the U.S. Q.E has helped propel the S&P 500 up as much as 153 percent from its March 2009 low, having reached a record high of 1709.67 on Aug 2nd, with world markets having hitched a ride to various degrees. Speculation about the Fed tapering stimulus has continued to whiplash world stock markets since May, when the Fed Chairman first indicated cuts could start sometime this year.
This is not a shock development. The Fed was always going to end its QE programme at some point. To date Asian stock markets have pretty much erased all of this years gains and the stock markets of the major emerging economies have also been effected with the markets of Brazil and India down more than 20% while China and Russia have fallen by about 12%.
These countries,which had looked attractive because they were growing faster than the sluggish West, now look less so as the US recovers. The big question is whether their economies can cope as the money leaves, or most importantly are they better prepared should the money leave ?
Hence, the make-up/ format of the initial Fed “ exit package ” will no doubt be a critical catalyst in influencing any strengthening of the US dollar, additional pressure on interest rates and an anticipated further dampening and volatility effect to stock markets and currencies around the world. We should get more certainty as regards market turbulence, and perhaps, for some, more sleep, following the Feds September 17-18 meeting.
Encouragingly, Q.E. aside, the worlds largest economy, with help from the Fed, is emerging from the great recession, with signs of resilience across the board. Home sales are rebounding, and the auto industry is surging. Businesses are investing and hiring. Banks have healthier balance sheets, and credit is easing at last, whilst at the same time the economy is slowly but steadily shedding the excesses of the past, such as unmanageable levels of consumer and corporate debt.
The U.S. economy grew at an annualised pace of 2.5% in the second quarter, more than double the pace recorded in the previous three months and well above the governments estimate of 1.7%, increasing world opinion, that the U.S. will be the new likely engine of global growth. Perhaps, by itself, that is not a bad thing. The world economy has relied on U.S. oomph many times before, however a broader global recovery would be far stronger and safer.
China- An economy “In Transition”
Despite its well publicized slow down in economic growth and its rapid rise in credit growth and subsequent debt ratio- ie what China’s firms, households and government owe,China’s economy, the worlds second biggest, may be inefficient, but it is not unstable. China whilst avoiding a hard landing will not be much of a spur to current evolving global growth, the result being a slower Chinese recovery that may rely heavily also on the U.S.
There is little reason to expect faster growth because China is in the midst of two tricky transitions:- from an investment-led economy to a consumption-driven one:- and from an economy addicted to rapidly rising credit to one that is more self -sustaining, both being addressed under its communist ethos and orchestrated by its government. To date neither transition has gone far,and both imply slower growth.
Under the guidance of new President Xi Jinping the transitions or “ rebalancing”, which includes the movement of hundreds of millions of migrant workers and their families to become permanent urban residents ( farm- factory ) to boost domestic private consumption and provide sustainable long term growth, will be extremely costly and will take decades to even partially achieve. China has little choice however as exports and investment, the old engines of growth, are both broken. Click here.
From a NZ perspective, despite ideally wanting a greater spread for product demand in other global markets, China is our second largest export market and trading partner to Australia, and will very soon be our biggest, currently accounting for approx 19% of our exports the main drivers being an increasing demand for our dairy and forestry products, contributing half of NZ’s growth since 2008. This rapid growth has been driven by higher volumes rather than prices.
China continues to have an ever increasing ravenous demand for NZ soft commodities pushing our terms of trade to historically high levels and boosting national income, whilst cheap imported goods from China have helped keep our inflation and hence interest rates low. Rising incomes associated with the “ rebalancing” program and underpinned by the consumer spending of the country’s growing middle class accompanied by moderation in their households high savings rates, bodes well for NZ as an efficient producer “ of the foods of affluence” eg quality meat, and bulk dairy related commodity products like whole milk powder , skim milk, butter and cheese.
At the same time the continued urbanisation of hundreds of millions of its citizens and the associated demand for housing will increase the need for timber as NZ’s “ wall of wood ”approaches , let alone tourism, education exports etc.
The Chinese CPI rose 2.7% in July from a year earlier, the same pace as in June and still well below the 3.5% upper limit government target. Meanwhile producer prices remained deflationary for the 17th consecutive month falling 2.3 % from prior year. Interestingly, from a NZ perspective, the CPI price rises are being driven almost entirely by politically sensitive prices of meat and vegetables, which disproportionately impact the poor. Beef rose nearly 30% from a year earlier with vegetables up by 12%.
Current economic growth sits at 7.5%, down from its previous long running average of 10%, but still looking good against the backdrop of a global economy struggling to grow at much more than 3%. Wages and retail sales growth continue to grow at double-digit rates, investment spending is currently a staggering 48% of economic output, compared to 15% in the U.S., and household consumption a mere 33%. Household consumption is the biggest economic growth driver in the U.S at 70%.
The benchmark one-year lending rate is 6% and the deposit rate is 3%. Whilst going through a major gear change, which may prove quite rocky in the next few years, the Chinese government has plenty of scope, if need be, for monetary and fiscal stimulus which will increasingly shape our own NZ future, whether we like it or not.
Australia- Another economy in “transition” , but to where !!
The Australian economy is another going through a major “ transition ” courtesy of its biggest export market China, having gone some 22 years without a recession thanks primarily to the Chinese appetite for its iron ore and coal .With such an appetite falling rapidly they are being pushed into experiencing a transition from rapid growth led by mining investment to replacement growth from other parts of the economy, unfortunately however there seems to be no current consensus of opinion as to which “ other parts of the economy” will provide any significant replacement growth, if any growth at all.
Whilst for some of Australia’s trading partners, U.S. and NZ for example, the GFC may be history, however unfortunately its legacy lingers on to continue to bite the Australian economy hard. Yes China is Australia’s biggest export market, BUT Europe is China’s biggest and Europe is still struggling big time. The Eurozone economy, despite the recent “ green shoots” , is still grappling with “ The Great Recession”. The Eurozone economy has been going backwards for eighteen months, with the UK having recently avoided going into a triple dip recession.
With Europe not demanding bulk products from China made out of bulk minerals sold to China then that continues to hurt those countries concerned. In 2012 China consumed 67% of the worlds iron ore, 45% of aluminium and 42% of its copper up from 12% in 2000, driving hard commodity prices to unprecedented levels. The ongoing Chinese rebalancing will continue to be bulk bad news for the main suppliers such as Australia, let alone the BRIC nations such as Brazil and Russia for years to come. A hard lessen learnt not to put all your iron ore in the one basket !!.. Or perhaps all your milk powder !!.
The overcapacity created and subsequent rebalancing will have huge flow on effects for Australia in Government surpluses, company profits, employment, trade relationships etc, etc. Having mismanaged the biggest resource investment boom in decades Australia now need artificially low interest rates to hold the economy together. At 2.5% the OCR is the lowest since the central Banks inception in 1960, having reduced from 4.75% in less than two years, 0.5% coming this year, with 90% of Australian mortgages on variable rates.
Australia’s economy grew a respectable 3.1% in 2012 and has slipped to 2.6% in the year to June. The current inflation rate is 2.4%. Unemployment continues to climb, up 5.7% in June from 5% 12 months ago and predicted to go to 6.25 % for the current fiscal year. Manufacturing activity fell for the 26th consecutive month in August, with traditional car manufacturing hit hard, while consumers have started saving much more and borrowing a lot less, a poisonous mixture for the retail sector.
The housing sector is the only non-mining part of the economy showing any signs of life with capacity for the RBA to reduce the OCR even further, however the worry is whether reducing rates further will be effective as industry sources advise that there are not many people out there thinking they would buy a house if only interest rates were not so high. The RBA looks like keeping the cash rate on hold for now perhaps believing Tony Abbot and the Liberal Party are the new panacea for growth, as being ruled by a government without a parliamentary majority for the last three years has added to their troubles with the incumbent often forced into messy compromises and policy flip -flops infuriating voters.
Aotearoa- First to get the sun, an OCR increase and possibly an “ artificial bubble ”?
In the short time it has taken to research and pen this Global View newsletter opinion on the state of our own NZ economy has gone from “ fragile”, to “ gaining traction”, to “ an economy on fire” to “ widespread and self-sustaining ”, to a “ sweet spot, outperforming most of the developed world”.
Even our traditionally dovish RBNZ Governor has been bullish recently stating “ New Zealand’s economy is now one of the most rapidly growing among the advanced economies and likely to remain strong and become broadly based over the next two years”. Clearly there is a wide consensus of opinion believing that within the recovering world economic cycle we find ourselves in a more advanced stage and stronger position than most, if not all, of our current key trading partners.
Wow !!, what are us Kiwi’s doing to have generated such confidence in a very short time, especially during a period when Australia, our biggest export market, is sliding inextricably backwards and Fonterra, our biggest exporting company, not for the first time, has continued to damage and erode “ the Trust” of the Chinese, our second biggest export market, soon to be our first.
Our key trading partners continue to be hell bent on promoting /encouraging Banks to lend more, to boost asset prices, people to borrow more, spend more, albeit on housing, the share market, new motor vehicles, and businesses to hire and invest etc.and generally increase activity and “ consumer confidence ” to stimulate their respective economies. In NZ today its a case of “ been their done that” on one or two of these fronts,whereby even in an economy that is predicted just to grow from approx 2.5% – maybe 4% in the next 12 months, we are already looking to mitigate any effects of a repeat of another “ bubble and bust scenario” in some areas.
We continue to see a breadth of improvements in almost all the key economic indicators. Inflation remains well contained having slowed from 0.9% to 0.7% in the June quarter, the lowest in nearly 14 years, well below the RB’s medium term inflation target band of 1-3%. The on going positive economic impact of the Christchurch rebuild amounts to an injection of $40bn into a total NZ economy of $210b . This in itself will lead to increased inflation however it is not expected to exceed the RB’s target band. The CPI rose 0.2% in the June quarter also below the RB expectations.
Business confidence is the highest for more than 14 years, on the back of strong housing growth, construction growth, continued low interest rates, continued high commodity prices, a “ boom” in recent net migration figures and the on going Christchurch rebuild. Even employment intentions are firming.
Concerns over our high NZ dollar have also eased, albeit perhaps temporarily, having slumped over the past four months from a twenty month high of NZ86.76 cents in early April on the back of the initial U.S. tapering press and the slowing Chinese economic growth, to below NZ80 cents. To add to all this positivity the NZ share-market has increased some 30% over the last 12 months and the NZ Superannuation Fund has experienced huge growth, showing its best ever annual return growing 28.8% in the year to June.
Well you may ask “ what’s the down side”, what are the negatives ? We appear to be in stronger shape than most to buffer the effects of Q.E. tapering and possible military upheaval in the middle east. However, whilst not absolutely sure as to when it will occur, we are unfortunately being conditioned daily to the reality of our RB raising our OCR years before other key central banks do.
Our OCR has been at 2.5% since March 2011 to allow the economy to recover from earthquakes, and to revive confidence after Europe’s sovereign debt crisis curbed global demand, with near- zero interest rates in the U.S. and Europe buffeting exporters as the NZ dollar has boosted up. All our recent positive data, coupled with the effects of the Christchurch rebuild, the fall in the NZ dollar ,our recent migration boom and surging house prices, in some areas, are leading to a greater risk of inflation, therefore an OCR rise sooner rather than later with most economists predicting the first increase in March 2014. Time will tell!
NZ housing – initiatives to build lots of them more quickly, whist at the same time prevent another “ artificial bubble”.
In our March Global View we discussed at length the then pending housing crisis involving a physical lack of properties in key areas, with demand exceeding supply at current prices. The housing shortage was most critical in Auckland. Prices, primarily in Auckland and Christchurch, were rising sharply with a suggestion that they were also “ warming” across the entire country. In March our net migration flow was actually negative.
At the same time the Government announced plans for changes to the RMA to help remove roadblocks that were slowing down the process and driving up costs for private sector investors ( developers and spec builders etc ) whilst the RB Governor was talking up the possibility of introducing “ financial stability” tools.
Such were to be an attempt to dampen the rapid price growth in the Auckland and Christchurch markets, slow inflation, slow down further currency rises in favour of our exporters and buy some time as regards our first inevitable OCR increase whilst ultimately avoiding a repeat “ artificial housing bubble “ and subsequent credit crunch.
Well there has been some significant developments, mostly positive, in recent months on a number of the above key issues with a number of economists believing we have at least three more years of “ housing heat”ahead of us with very little the Government can do.
Total housing sales for July were up 15% over July 2012, with the median price easing back further for the third time since the March record high. .Compared to July 2012 the national median house price also eased back in July, up 6.6% from the previous year, with 64.0% of that increase occurring in Auckland. In August the average house in Auckland rose a modest 3.3% , down to 13% annually despite the highest number of new listings in any August on record. The sales numbers were up 5.7% over July and 18% over the prior year.
Given the rapidly increasing Auckland figures in the 12 months to March these most recent figures would suggest a much warranted slow down. After talking about “ financial stability” tools earlier in the year the RB actually “ put their money where their mouth was” last month and announced measures, effective 1/10/13, to restrict Bank lending to “ new to Bank customers ” with LVRs above 80%.( loan to value ratios ) in a bid to rein in house price inflation.
Not surprisingly all the banks and the real estate agencies pooh-poohed the new regulations as having little or no impact on the overheated markets and tight housing supply. Hello !, could it be that as all the banks and real estate agencies have a vested interest in the property market not slowing, it being to their advantage to play down the effects of such restrictions.
Since early July bank statistics show a steady drop in new loan approvals in line with the weakening Auckland real estate data mentioned above. This would suggest that the pressure on the Auckland housing market may be easing and despite the huffing and puffing from the banks and the property sector, just maybe the RB know what they are doing and will indeed buy some time as regards our first OCR increase and prick any “ bubble”, perceived or otherwise.
To further complicate the Auckland housing pressure situation, in only five months we have gone from a negative net migration flow figure in March to a soaring boom situation on the back of Kiwis flocking back from across the ditch as things deteriorate further there. July net migration was plus 10,600 up from 7900 in June and a net loss of 3800 a year ago and could easily approach 20,000 by the end of the year, the average over the last 10 years being 10,500.
Not to be outdone by the RB the Government also have delivered on two key promises made earlier this year to “ fast track ” RMA changes that were holding back housing development and making New Zealanders poorer. Click here, and to get section prices and new housing costs down via a number of initiatives the major one being the Housing Accords Bill in support of the new controversial Auckland Councils Unitary Plan, due out in the next two week. Click here.
Under the Accords they plan to open up land in Auckland and to build 39,000 new dwellings over the next three years. This legislation is due to be passed this month. If the growth accords cannot be agreed the Bill will allow the Government to overrule the Councils and further “fast track” the process Click here.
New development finance products and how “ Global can add value”
With the residential construction industry poised to boom we are confronted with a lag effect as many developers and spec builders were so badly burned by what happened in 2007 that they either left the country, failed or even stopped building.
Many that remained have already relocated in support of the Christchurch rebuild, however we are also experiencing renewed demand across the board from developers/spec builders of all sizes, whether it be new players entering the market or the return of experienced operators with the building industry in general now urgently needing to get in sync with the demands of the current market, as soon as possible.
With this strong guaranteed housing demand coupled with the above initiatives now also spreading out from Auckland and Christchurch, to other centres, the term- “ development funding”– has moved from a dirty term to a sought after commodity. The demise of the majority of finance companies over the past 4-5 years has left a large hole in the property development financing sector, which is taking some time to fill.
We are however seeing the emergence of a new breed of property lenders and specific products, some of which are based around one or more high net worth individuals, with the support of bank credit lines. These lenders are now developing to the stage where they can fund transactions from the sub-division of a residential site, up to apartment or sub-division developments. We are also now seeing the re-emergence of the mezzanine lender, who is prepared to come in behind a 1st tier lender and finance a portion of the traditional equity requirement.
Development finance from 2nd tier lenders aim to meet the commercially sensible needs of a developer who is unable to satisfy the more stringent terms of a bank lender, and often there is an ability to blend both in a mortgage to get the funding proposal across the line.
The strength of demand, in the main centres, means that all lenders are now prepared to push the boundaries further than they were 12 months ago, and we don’t see this diminishing in the short to medium term, whether it be high gearing or lower pre sale requirements. A recent example of this is the $250m Sugartree apartment development in downtown Auckland launched by mayor Len Brown recently, which was financed through Global Pacific.
Somewhere to go when the Bank says No!, or Maybe?, or Yes – but with plenty of restrictive conditions !!!
Global Pacific now has available a number of specialist “ development” products providing considerable flexibility over current restrictive bank criteria, specifically designed to take the hassle away from construction lending and minimise the risk of development for residential spec housing,construction of pre-sold housing, investment/ rental properties or just renovations.
How do terms differ from Trading Banks?
Traditional Trading Bank Approach
Lend to 75% of the completed valuation
Lend to 75% of the cost to complete
Minimal deposit required
Large deposit required
No financial statements required
Full financial statements required
No debt servicing or income surplus evidence required
Evidence of debt servicing to meet bank criteria
No cash-flow forecasts required
Cash-flow forecasts required
No liability or risk to personal assets
Full personal liability for any shortfall
Progress payment amounts are agreed in advance
Progress payments are assessed during construction
Current Equity/ JV opportunities
We also currently have three major equity project opportunities available as follows:
These opportunities are aimed solely at persons who confirm that they fall within one of the exceptions set out in section 3 (2) of the Securities Act 1978, and Global will not accept unsolicited applications.
As always to obtain funding it’s a case of knowing where to go, the criteria each funder is looking for and a proper presentation being the key essentials to success.
In today’s market if we at Global cannot source funding for a particular deal, whatever the type or risk profile, then nobody can.
Should you or any of your clients or colleagues require specific development finance as outlined above or finance of any type albeit, residential, commercial, industrial, business, asset finance, development funding, rural or finance of any description, or should you be interested in participating as an investor in any of the above equity projects , please call me any time on my mobile 021 333 011, or contact me via email.
From the team at Global Pacific
Global Pacific Corporation Ltd
September 2013 - Aotearoa- First to get the sun, an OCR increase and possibly an “artificial bubble” ! Read more...
February 2012 - Optimism or Pessimism – Is it time to move forward and “make things happen”? Read more...
February 2011 - “It is important to learn from history – not dwell on it” – JK Read more...
January 2011 - Inflation, interest rates and opportunities Read more...
September 2010 - Looking back – and forward Read more...