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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories: House prices: When denial is systemic. China hard landing still on the cards. Merger mania or merger dose of reality. Companies in the news: Petra Diamonds, United Utilities, Glencore and Xstrata.

House prices: When denial is systemic

Bear:     According to Nationwide, house prices fell 0.2 per cent in January. Robert Gardner, Nationwide’s Chief Economist, said: “The demand/supply balance may move further in favour of buyers in the months ahead. The economy is not expected to gather much momentum until the second half of 2012 at the earliest, which suggests that labour market conditions and buyer sentiment may be slow to improve…Nevertheless, with the flow of properties coming onto the market still more of a trickle than a flood, house prices are likely to continue to move sideways or only modestly lower in the months ahead.”

Hometrack recorded a 1.6 per cent year on year fall in house prices in January. It stated: “Given the pressure on household finances and the outlook for the wider economy as a whole, we expect only a modest improvement in levels of demand in the coming months. The net effect will be a continued negative balance between supply and demand (see figure 3) pointing to further downward pressure on prices in the months ahead.” The two organisations seem to be in agreement. Supply is low and expected to remain low, but demand is expected to be even lower, therefore prices will fall this year – but only slightly.

Bull:       Both agree London is a special case, and should buck the national trend.

More bull:           But according to the Halifax, 29 per cent of Britons believe that house prices across the UK will increase over the next twelve months. Just 22 per cent predict a price decline over the same period. And since expectations can affect real prices, such optimism may become self-fulfilling. In  one respect, expectations and forecasts from economists are in alignment. Britons are even more optimistic about house prices in London.

Conclusion: Non home owners are scared. They fear that house prices will surge again, making them even more unaffordable. They are terrified of being left off the ladder. Alas, the lesson has not been learnt. House prices are too high, and given that there is a chance that interest rates will shoot up in the second half of the decade; given that average households are still seeing falls in real income; and given shaky job prospects, buying a property right now is a very risky thing to do. But still property ownership is seen as the sure-fire way to riches; to paying for retirement. Buy to let investing is still seen as preferential to real entrepreneurship.

China hard landing still on the cards

Many have been breathing a sigh of relief. Talk about China suffering a hard landing has been turning into talk of a mild recovery. But yesterday, certain data seemed to contradict that. And at least one economist has now predicted a hard landing this year for the economy behind the Great Wall.

The data was hidden in the depths of the latest official PMI reading for China. Sure, the headline index was up – that’s the good news. But the indices related to exports and imports were very disappointing indeed.

The new export orders index fell from 48.6 to 46.9. That was a truly awful reading. As you probably know, any score under 50 is meant to suggest contraction, or, in the case of China, a sharp slowdown in growth. This is serious blow, because China still relies on exports for charging growth, and it can no longer rely on using government spending and investment to propel the economy in lean years.

Oh well, perhaps it can grow via consumer spending. And, of course, that’s what the rest of the world wants. But the index tracking imports also put in an abysmal showing, also falling to 46.9 – the lowest reading since early 2009. To an extent the fall in imports is a consequence of falling exports – after all, China does import raw materials, assemble them into products and export them. In other words, to an extent it imports in order to export. But China has been making noises about consuming more, and consequently importing more to meet consumer demand. The index implies that this has not been happening.

Bloomberg quoted Gary Shilling, a US economist who predicted the US recession that began in 2007, as saying China is heading for a hard landing this year. He defined a hard landing as meaning growth of less than 6 per cent. By Western standards that may still seem good, but for China such a slowdown in growth would be considered a disaster. Such a growth rate would send out shockwaves that could even threaten China’s regime.

Bull:       But don’t be too hasty. According to the alternative PMI, produced by HSBC/Markit, the new export orders index rose from 49.7 to 50.4. It is too early to say China will avoid a hard landing, but it’s way too early to say she won’t.

Merger mania or merger dose of reality

As one deal falls through, an even bigger one falls under the spotlight. The merger of NYSE Euronext and Deutsche Börse is off. Regulators at the EU said no, and so that’s it. It was fears over the dominance such a company would have over exchange traded derivatives  that put the kybosh on the plan.

Frankly, it wasn’t a surprise. In fact, the real surprise is that this industry has been allowed to see as many mergers as it has. In the long run, however, because of the opportunities technology brings, a question market must hang over the very viability of the business models of any stock exchange.

But, in the world of mining, it is different. Technology can’t replace the need for raw materials – not yet, anyway. And now Glencore and Xstrata are apparently in advanced talks about a merger.

It seems like a good synergy: Glencore is the world’s leading commodity trading house, Xstrata mines an awful lot of thermal coal and copper. The FT reckons the news may trigger off a range of other mergers across the sector. After all, many of the companies in this industry are sitting on a good deal of cash, and what else can they do with it other than fund mergers? (Who said pay bigger dividends?)

Pity poor old BHB Billiton. The world’s largest miner has been desperate to do a merger, but so far, no good. When you are the world’s largest miner, it is hard to merge (buy) another company without that thing called competition concerns rearing its ugly head.

But, when an industry is subject to a kind of merger mania – or in the case of BHB a wannabe merger mania – there is only one way shares can go, or at least that’s how it seems.

Companies in the news

Bull:       Questor took a look at Petra Diamonds, a company it has tipped before. Yesterday saw some impressive production numbers coming out of the company. And Questor reckons that as the global economic outlook improves, the price of diamonds will go up. And so it said “buy”.

Bull and bear: In the ‘Times’, Tempus was not in such a good mood, it said “hold” United Utilities, which pays out a nice little dividend, and is targeting inflation plus 2 per cent. But there is the issue of all that money that needs to be spent on the UK water industry infrastructure. Bear:     Meanwhile, both Home Retail and Brewin Dolphin got the “avoid” tag in Tempus.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees