What Would Donald Do?

From: Derek Hillen
Sent: Thursday, February 23, 2012 10:37 AM

“A hair in the head is worth two in the brush.”  - Oliver Herford

Keith Yeung, head of property research, has beavered away and produced a 100 page tome on the HK property market, “Property Deflation.” Inside, Keith explains why: 

-          He remains underweight the sector

-          He increases his forecast price declines this year from 15% to 20%

-          He downgrades Henderson Land (12 HK) and SHKP (16 HK) to Reduce

Since bottoming in May 2003, average HK residential prices have soared 269%, a super cycle driven by a continuing weakening USD and strengthening Rmb which has also fueled the local economic recovery. These reflationary forces are now set to ease with the outlook favoring a stronger dollar and a weaker Rmb. How does dollar strength or weakness affect the local property market? This chart is illustrative:

Under this scenario the outlook for the local economy in HK is weak with a rising unemployment rate which will put add to the gathering property market headwinds.

Finally, Keith is also forecasting a 50 bps cap rate expansion for office properties to 5%.


How is earnings season shaping up in the US? If you look into the results of S&P companies that have already reported the answer is: not so good. According to Bianco Research which compiled the data, of the 370 S&P 500 companies that have reported Q4 results so far, 63% beat expectations. This is one of the lowest beat rates of the last decade. That is still better than half but wait, put that grilled cheese sandwich down. Profits are relatively “easy” to “fudge,” revenues are not. What’s happening there? Only 43% have beaten on the top line. When looking at overall profit numbers the other thing to contemplate is Apple.The company reported Q4 net income of $13.1 bn. Take those numbers out of the equation and the average 5.5% earnings growth rate for the index likely turns negative.



Derek Hillen, CAIA

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