Setting the scene is Andrew Milligan, head of global strategy at Standard Life Investments.
There are only three big trading blocks you need to worry about, the US, China and the EU. The others either help a little, like the UK and Japan, or hinder a little, like Brazil and Russia. If we are going to achieve solid growth over the next couple of years we’ve got to get at least two of those big trading blocks motoring, preferably all three. Part of the difficulty is there has been a big drag from Europe that’s been weakening the world economy, hence reliance on US and China.
For a number of years people have been saying: ‘This is the year where global growth is going to achieve 4%,’ and each year there have been disappointments, whether it’s related to the eurozone crisis, or the oil price decline. We have to accept the fact we’re seeing amazingly strong efforts by banks around the world to keep growth at these historically low levels.
Asset allocation for diversification
In broad terms, as ever with real estate, what you’re looking for is the supply/demand mismatch – a growing economy which has not been producing sufficiently high-economy real estate, which businesses need. The UK cycle has been very obvious is this regard. The economy has been growing, employment has picked up, but because of the weakness of the banking sector there has not been that much new-build. We have seen some very significant property returns in the UK, as an example. This is a perfect opportunity to start rotating within property, out of the UK into European real estate where some countries, like Spain, are doing much better than other countries, like France.
Even residential housing is beginning to be seen as an opportunity as well. It’s not just buying the equity but the real estate debt – infrastructure debt is another way of getting exposure – directly held
The liquidity concern
There are different sorts of liquidity: trading liquidity, the ability to get in and out of a market, is not that great in currencies and government bonds. Obviously, the trading liquidity of real estate is low compared with the trading liquidity of equities generally, unless you’re going into real estate investment trusts.
The liquidity that the banks are creating is effectively not just money supply and the expansion of money supply, but the deliberate buying of certain assets by central banks. They are creating a very sizeable amount of liquidity which is feeding through the world economy, driving interest rates down, driving certain capital flows. You can see that through Sydney’s prices bubble, Hong Kong’s house prices bubble, up-market London house prices bubble, but not yet into other asset classes.
Let’s differentiate between liquidity, money supply growth, expansion of credit, borrowing costs which central banks are working on, and trading liquidity. The ability to buy and sell quickly at a price that I’m happy with has recently become more difficult for certain assets. The German bond market sell-off, the flash crashes that we’re seeing in some markets at present, is because there are no two-way trades being seen in some markets, which is really quite frightening.
The word ‘liquidity’ needs to be defined very carefully.
