A recent Bloomberg article entitled The Super Rich Are Snapping Up Tokyo’s New Ultra-Luxury Homes states that, “The lack of uber-luxury apartments in Tokyo, a city otherwise full of indulgent shopping choices, has long baffled foreign investors. But that’s starting to change as new developments with sweeping views, swimming pools and 24-hour valets are snapped up by local and overseas buyers taking advantage of a weaker yen and low interest rates....
....the average selling price of new apartments in the Tokyo area doubled year-on-year in March. Price gains have moderated since then but were still up 60% in April and 48% in May, according to the Real Estate Economic Institute…..A prospective buyer with a million dollars can purchase twice as much prime real estate space in Tokyo than they would in New York, and three times more than in Hong Kong, according to Knight Frank’s annual wealth report for 2023. Japan’s inflation, which is picking up after years of deflation and lackluster economic growth, is also bolstering the real estate market on the back of higher labor and raw material costs.”
One of the headwinds facing city centers is the projected decline in office space. In a recent Bloomberg interview, Barry Sternlicht of the Starwood Capital Group warned that the commercial real estate (CRE) space is in a “category 5 hurricane.” According to Sternlicht, “It's sort of a blackout hovering over the entire industry until we get some relief or some understanding of what the Fed's going to do over the longer term.”
According to Confounded Interest, “The current downturn in CRE could persist for years, if not through the end of this decade. The McKinsey Global Institute published a note in Fortune, warning that “$800 billion of office space in just nine cities [around the world] could become obsolete by 2030.”
On another note, I expect that Money will likely shift out of FAANG and related Stocks into Financials, Energy, Value and Foreign Stocks. Therefore, it would be entirely possible that the US stock market remained elevated but that money simply shifted out of the highly priced sectors (high-tech and everything AI related), into relatively depressed sectors, which would include energy, banks, natural resources, agriculture, commodities, precious metals, European and emerging markets.
Last month, we discussed favorably Brazil and Petrobras (PBR). A similar positive outlook seems to be unfolding in other Latin American markets including Colombia. To the surprise of most market participants the Colombian peso is up by 22% against the US dollar and the Argentina ETF is up 44% year-to-date.
I want to reiterate what I said in earlier reports. Energy is the least expensive sector not only within the US stock market but also around the world.
What caught my attention is the recent strength in agricultural and related stocks such as Bunge (BG), Mosaic (MOS), Cresud (CRESY), Minerva (BEEF3 BZ), Adecoagro (AGRO), and JBS (JBSAY) as well as in agricultural commodities such as wheat, corn, and soybeans. The country that would probably benefit the most from rising ag prices would be Argentina. I continue to hold Argentinian stock such as Telecom Argentina (TEO) and Banco Macro (BMA).
The Juggling Dynamite blog recently noted that, “For those who pay attention to risk/reward dynamics, the prospective compensation for US equity risk over Treasury bonds is today the lowest since the market peak in 2007-08 (S&P 500 forward earnings yield minus the ten-year Treasury yield).” Downside risks to equity markets have not been eliminated.
Where higher interest rates may be beneficial is in the banking sector. I want to alert my readers that a major improvement for stock markets around the world has been the strength in financial stocks. Particularly encouraging is the upward breakout of stocks such as JPMorgan Chase (JPM), Morgan Stanley (MS), Charles Schwab (SCHW), Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), and in Europe of Intesa Sanpaolo (ISP IM), and Banco Santander (SAN SM). Similarly, Singapore and Thai Banks have most recently had strong upward moves with heavy volume including DBS (DBS SP), UOB (UOP SP), OCBC (OCBC SP), Siam Commercial Bank (SCB TB), Bangkok Bank (BBL TB), and Krung Thai Bank (KTB TB).
Even Chinese banks and insurance companies and Hong Kong’s Hang Seng Bank (11 HK) are showing signs of improvement.
Lastly, deep value stocks among emerging markets are to be found in Iraq, Sri Lanka, Pakistan, Uzbekistan Nigeria, and South Africa.
For me, war escalation remains a concern. As former UK Prime Minister Stanley Baldwin observed, “War would end if the dead could return.”
With kind regards
Yours sincerely
Marc Faber
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