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Bull and Bear – an optimistic and pessimistic view of investment news. Today’s stories:  House prices: barometer index set fair to good. Are the markets too optimistic? Apple shares in sell-off. China overtakes US in smart phones

House prices: barometer index set fair to good

In November and December, the runes looked promising. But the conclusion was always let’s see what next month brings before we start drawing conclusions. Well next month is now this month, and this time the inference is a good deal clearer.

As has been pointed out here before, the monthly housing market survey from the Royal Institution of Charted Surveyors (RICS) is a good one.  Every month RICS asks estate agencies if house prices were up or down in their area, plus a host of other really interesting questions too – more of that in a moment.

The RICS headline index has proven to be a most reliable indicator. Just to remind you, if it’s more than zero, that means more estate agents had prices rising; if it is negative more had them falling. The resulting index has turned out to have a pretty smooth trajectory over time, not subject to the wild monthly swings seen with indices from the Halifax and Nationwide, for example.

It only rarely moves from positive to negative (or the other way round). When it does change it tends to stay on that side of the axis for some time. Furthermore, when the RICS index does go positive, or negative, after occupying the other side of the axis for some time, other indices tend to start showing complementary readings soon afterwards.

The RICS index for December was out today. The headline index went from minus 9 in November to zero. It was the highest reading since June 2010.

rics

Of course a reading of zero suggests house prices neither went up nor down but were just flat. But it’s the trend that is so telling. The fact is that the index has been gradually improving for some time. In late 2010 the index approached minus 50. In 2011 the index fell to around minus 20, and broadly stayed at that level, moving only slightly each month for the following year. During this period the RICS index was consistent with modest falls in house prices. Regional readings showed that the market in London was very different to everywhere else.

In the second half of last year the index started to improve by rising to minus seven in October – a 28 month high – falling back marginally in November, and now rising to that key change-over level.

Furthermore, the RICS index tracking price expectations moved to plus 1, the first positive reading since May 2010. The index tracking new enquiries – an indicator of demand – rose from 10 to 12, while the index tracking new instructions – an indicator of supply – was two, the same as in the previous month.

Peter Bolton King, RICS Global Residential Director, commented:  “As we start the new year confidence in the housing market does appear to be improving, helped in part by the impact of the Funding for Lending Scheme. Indeed, our members are predicting that transaction levels will continue increasing in many parts of the country and it may be that we are now over the very worst.

“That said, more still needs to be done to ensure potential buyers can access the market at every level. ”

It does remain a puzzle, however.

The fact is the UK economy is a long, long way from recovery. In order for demand to increase and create sustainable growth, inflation needs to fall so that growth in average wages rises faster than consumer prices. In order for the UK to enjoy an export led recovery, as many believe it needs to, we probably need a cheaper pound, which will push upwards on inflation.

So in that near impossible situation for UK plc, the housing market starts to look more promising. It is a struggle to make all this compute.

Then again, with interest rates so very low, and with the funding for lending scheme apparently beginning to help property buyers – even if it isn’t helping businesses – and with rents rising faster than inflation, it is not hard to see why Brits are so anxious to get a foot on the so-called property ladder.

The fact remains that the UK will have a much stronger economy when it is led by businesses – and entrepreneurs in particular – rather than the housing market.

Are the markets too optimistic?

And so the markets are rising, the bulls are back in town, while the bears have gone into hibernation. The question that has been asked here recently is why? Maybe it is because there is a lot of money sitting around, the return on bonds is awful, and so the slightest whiff of good news turns traders into bulls.

Or maybe enthusiasm is contagious.

Writing in the ‘FT’, James Mackintosh expressed a similar point of view, but backed by charts. See the video here:  – Amber lights are flashing for equities 

Firstly Mackintosh pointed to what is called the ‘relative strength index’, which is a measure of the direction and speed of stocks. He said this is: “Well into the danger zone where it then tended to snag back shortly afterwards.”

Then there is the VIX index, which measures how much investors think they need to spend to protect against losses. This index is back to below 14. Only very rarely has it been so low in recent years, and when it has fallen this low in the past sharp falls in shares have often followed.

Mr Mackintosh also pointed out that hedge funds are buying into shares, while company directors are selling.

Apparently, the American Association of Individual Investors has bulls outnumbering bears the most since last April just before shares fell sharply.

And finally a survey of commentators shows that bulls outnumber bears, although sentiment was more extreme in 2010, 2011 and last year before big sell offs occurred.

Of course it is possible such optimism is caused because there are reasons for optimism.

But it surely boils down to company earnings, and if you want to dig even deeper than that, the economy, because company earnings cannot be positive indefinitely if the economy is negative.

Apple shares in sell-off

The rumour mill was busy churning away yesterday. It ground out talk that Apple has been cutting back on its orders for components for its iPhone 5.

It was just a rumour. But it was enough.

Shares in the world’s largest company by market cap fell sharply.

Mind you, the rumour is slightly odd, because a few months ago Apple said it was struggling to keep up with demand for its new iPhone.

Its latest results will be revealed shortly.

The Truth is that in the developed world the smart phone market is looking pretty mature now. It is hard to see where the next earth shattering innovation will come from – perhaps it will relate to the screens, and roll-up screens. Maybe in a few years’ time we will be able to fold up our smart phone like it was a piece of paper, and stick in our top pocket, or have it embedded into glasses so that we are always online and always as it were seeing the Internet.

But right now, the smart phone market in the developed world may be reaching some kind of peak, or at least we may be getting close. To see growth continue, Apple may need to focus more on China and the developing world, which may mean it will need a cheaper phone.

But don’t forget that the markets did not anticipate the scale of the smart phone revolution, and they did not factor in the potential of tablets, and right now they may well have underestimated the significance of Internet TV. This is where Apple’s next big opportunity will come from.

China overtakes US in smart phones

Talking of smart phones and China, according to Chinese research firm iiMedia[J2]  , sales of smart phones into China are now greater than into the US, which has seen 321 million units sold to date.

According to this piece on ‘CNNMoney’, by the end of this year total sales of smart phones into China will exceed 500 million. See: Smartphones: China’s next great economic indicator 

But in China, PC penetration is low, meaning smart phones may be the main driver of Internet traffic.

The development of the Chinese smart phones  is not only significant for the likes of Apple and Samsung, it is significant for online shopping, social media, (Facebook now has 63.5 million users in China, despite  restrictive access to its service. see: Facebook Rises as 63.5 Million Users in China Skirt Ban ), and it may yet prove  significant for the development of democracy in China – providing squabbles between Republicans and Democrats in the US don’t put China off the idea for good. It may even be significant for economic development  as the Internet increases the mobility of ideas, and enhances cooperation.

 

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


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