How to inflate a real estate bubble? Make it official central bank policy!
That’s the only logical reading of the situation in Europe right now. It might be Australia’s future too if current trends persist.
Bloomberg reports that Denmark’s pension fund industry is piling into real estate because it’s one of the few areas left where they can generate a return.
They certainly don’t expect bonds to pay anything anytime soon.
And why is that?
The European Central Bank is imposing a negative interest rate policy on banks and has run an enormous Quantitative Easing (QE) policy over the last decade.
Naturally, this is sending property prices inflating across Europe.
The same thing sending asset markets into overdrive deflates the real economy.
We’ve seen this playbook before. It’s what happened to Japan in the 1980s before two decades of stagnation.
And why should we care? Well, for one, Europe is a major global market.
The domestic economy there is as droopy as Ho Chi Minh’s moustache. What’s propped up Europe is its trade exporting to China.
That’s a worry when the China slowdown continues to play out.
But that’s not our concern for today. We’re wondering if Europe offers a glimpse of the future as far as Australia is concerned.
We also have our own RBA cutting interest rates to the bone and tabling QE as a potential ‘solution’ to the low growth across the economy.
I think it’s reasonable to assume we can expect the property market to respond in the same way. We don’t have to look far, either.
The Australian Financial Review reports that low rates are a big part of sending yields on Sydney industrial real estate below 5%.
China commodity demand: a new front
Australia also relies on Chinese trade to keep the lights on at home. That means both Europe and Australia need China to keep growing.
A commodity strategist in the Financial Times says we can no longer assume China will consume natural resources in the same way as the years leading into 2008. Most likely steel consumption has peaked.
But that doesn’t mean there isn’t opportunity.
History suggests the commodities to focus on are those that will be needed in the burgeoning Chinese consumer economy.
Then look for those that China has no choice but to source from the world market.
The ‘problem’ for you and I, as investors, is that sentiment heavily drives mining stocks.
It’s one thing to find a solid project run by competent people at a good price.
Then it’s a second step to trust the commodity price (whether it’s copper, gold or whatever) is heading in the right direction.
You then usually need the sector to catch the eye of the crowd from a big ‘growth’ story.
The last big one was the battery metals and the rollout of electric vehicles.
It’s hard to see the next one of those right now. Perhaps India if they can get their act together (it won’t be soon).
The exception to this general rule about big growth stories is a major disruption or supply squeeze that sends a commodity price spike in motion.
I think oil is at risk of this. We’ll know within two months.
Here’s a positive thing we can say about a lot of commodity stocks on the ASX.
They mostly don’t have big growth premiums built into their prices. That’s not easy to find in today’s market.
But we now also have an additional risk that is relatively new.
The millennial fantasy land
It’s the perception they are a major part of the climate change problem.
Substantial investment dollars are flowing into ‘green’ and ‘ethical’ funds.
Many of these eschew oil and gas companies. One wonders how longer that boundary stretches to include other sectors of the mining industry.
None of this is going to make finding and developing new sources of supplies any easier or cheaper.
For example, already some banks are refusing to finance coal projects.
Nobody is going to shed a tear for the coal industry in the metro areas of the Western economies. But it’s not their job getting the flick, either.
Think of this from Australia’s perspective. Our entire export earnings are built on mining exports. We’re dependent on China — a massive polluter.
But millennial sentiment is swinging to some fantasy la la land where Mother Earth is never disturbed but we keep cheap fuel, iPhones and international travel. Call it the curse of the complacent.
My guess is the Australian dollar would be about 10 US cents without the mining industry.
And yet the more environmental activists target resource companies, the more tempted they will be to hold back investment dollars in new projects.
It’s possible inflationary pressure begins to build in the natural resource market sooner rather than later anyway because of miner aversion to debt and modest commodity prices.
That means the mining sector is one to watch over the next six months.