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Currencies, Singapore property and crude oil A look at the indian rupee, sterling, yen and euro, property price rises in Singapore, and crude oil and the valuation discount in energy shares

The Macro View

Currencies – What next for the Indian rupee, sterling, yen and the Euro?

I reiterate my call last week for a depreciation in the Indian rupee to at least 66 against the US dollar. Note that the India is showing the fastest GDP growth of any major emerging economy on the planet, coupled with fiscal slippage and rising domestic bond market yields. The 10 year Indian G-Sec yield has now risen to 7.72% and the latest Punjab National Bank corruption scam has spooked global fund managers. I expect the Reserve Bank of India (RBI) to express concern about inflation risk as 7.2% GDP growth will pressure the fiscal deficit. The Indian 10 year debt is in its most protracted bear market in a decade and more aggressive rate hikes by the Powell Fed will unquestionably trigger an exodus of offshore capital from Dalal Street. Banks will also face higher Treasury mark to market losses. It is no surprise to me that the US dollar has risen 2.6% in February, the most in the Modi era. The greenback’s winning streak against the rupee will continue in 2018.

Financial markets worldwide have reacted very negatively to President Trump’s decision to impose draconian tariffs on imported steel and aluminium. The prospect of a global trade war are awful enough but Trump’s decision could well cause top White House economic advisor Gary Cohn, an ex-Goldman Sachs President and confirmed globalist, to resign. The cash Volatility Index (VIX) is higher than its future contract. US Treasury and German Bund yields have sunk on safe haven bids. Steel tariffs are a disaster for emerging markets currencies as diverse as the Chinese yuan, South Korean won, Russian rouble, and the Indian rupee. Sadly, this is the FX Trump trade for 2018!

Michel Barnier’s decision to publish an EU draft treaty and political conflict about a potential Northern Ireland “hard border” in Westminster slammed sterling to 1.3750. Sterling’s outlook is more dependent on the politics of Brexit than on relative UK central bank monetary policy or economic data momentum. Britain will now refuse to settle the divorce bill until the EU backs down, as Secretary David Davis reassured the UK media. This will limit any short term sterling upside, even as Powell’s comments lift the US Dollar Index well above 90. Yet the sterling options market suggests no real investor scramble to buy downside risk. For now, I expect cable to trade in a 1.36 – 1.40 range and 0.86 – 0.89 against the Euro.

The selloff in global equities and multiple political risks (Brexit, Italian election, the Russian cyber – hacking scandal, the German SPD coalition vote) has amplified the safe haven bid in the Japanese yen. Dollar-yen could well range trade in a 104 – 107 range. The Bank of Japan’s decision to cut long duration bond purchases will also lead to a resurgence in yen bulls.

The Euro’s rally since November was crowded even before Powell’s comments spooked the bulls. Data momentum has also favoured the US over Europe in the past month. Political risk is also rising in Europe, as Italian and German coalition politics attest amid a new US-Russia cold war and a Brexit big chill. These factors can well cause the Euro to depreciate to 1.20 before bulls reemerge. Europe’s fundamentals are intact. German manufacturing PMI’s are at 60 as Deutscheland AG’s export colossus benefits from higher GDP growth. At a time when Trump’s tax cuts mean Uncle Sam’s budget deficit, the US current account deficit and inflation will all rise in 2018, Europe offers investors a current account surplus, s shrinking budget deficit and near zero inflation. The US midterm Congressional elections, Trump’s trade war with China and special prosecutor Robert Mueller’s probe means political risk will rise in Washington. The ECB has no need or desire to protect current/levels in the Euro. Once long positioning is called, the ease for the Euro longs will resume.

Fed Chairman Jay Powell was right to highlight inflation risk since Wall Street is obsessed with tight US labor market and 2.9% US annual wage growth. Four Fed rate hikes in 2018 were obvious to me long before the incoming Fed Chairman confirmed them to the Senate. If the Powell Fed mismanages a soft landing or misjudges the economic cycle, a US recession becomes inevitable. When the Goldilocks economy overheats, Papa Bear is the endgame!

Macro Ideas – Bullish case for Singapore property prices in 2018!

If there is one global hub where property prices will rise in 2018, it is Singapore. All the metrics I track to guesstimate a bullish property cycle “inflection point” are now in place. Property sales have surged 45% since December 2016. The Lion City’s biggest developers have begun to bid aggressively to expand their land banks. Local end users, not offshore hot money, has driven sales volumes higher. Wealthy Indian, Chinese and Southeast Asian buyers have begun to accumulate homes in the Core Central region. Singapore bank credit growth is robust and the Straits Times index rose up 20% in 2017. Unsold homes inventories have fallen to 16 years lows at a mere 29,000. The presales pipeline is white hot.

In Singapore, property developers do not exploit their clients and are content with 10% profit margins, not the 50-60% margins developers in the GCC routinely extract via offplan pieces of paper. This is one reason I expect the property bear market in the GCC to worsen while the prices of homes, land, office and industrial property in Singapore moves sharply higher in 2018. Retail? No way, la! Amazon kills even in the Strait of Malacca!

There is no doubt in my mind that a supply squeeze, cheap financing and stellar economic growth make Grade A office buildings (ownable via listed REIT’s on the SGX) makes strategic sense at this point in the property and credit cycle.

The cap rates in the private market have compressed on an epic scale and are nowhere near reflected in the office REIT’s trading at 80% of NAV, meaning I can invest in Grade A Singapore office buildings at a higher yield and below replacement cost in the stock market. My obvious twin crown jewels in the Singapore office REIT market are Capital Commercial Trust and Keppel, since both benefit from access to razor thin bank finance spreads, a credible acquisition pipeline, the wildly bullish outlook for the limited commercial government land sales (GLS) and rising rents, institutional investor flows and valuation rerating potential. To paraphrase the Singapore Airlines tagline, from my youth, Singapore REIT’s, what a great way to fly!

Singapore grants high income/executive expats permanent residence and a path to citizenship. Uncle Sam gave me a Green Card but also the IRS but Uncle Lee requires me to send my boy to the Singapore Army. So I follow the old axiom. East is east and west is west, but Dubai is best! Yet these features of the Singapore job market means long term demand for property is not dependent on speculators but correlated to employment growth, the rise of new sunrise industries, jabs, wages and income growth. All the macro/micro-market indicators here flash buy signal, including positive leverage in the cost of home finance.

Singapore’s “nanny state” DNA means government policy is mission critical to grasp the opportunities and risks in the property market. So the relaxation of property measures in early 2017 led to the surge in sales volumes. I doubt the Singapore government will increase land tender in 2018 to dampen price rises.

The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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