Dan Toh examines the impact of the worsening US-China trade war on property markets.
The world never ceases to amaze me with new economic tantrums. From the Great Financial Crisis to the commodity crash, from EU crisis to the US election, from Brexit to now the Trade War. Fortunately, properties, relatively speaking, are less subject to such tantrums as other instruments such as currencies, equities and commodities. Markets well anchored by strong housing fundamentals are much more resilient against such turbulences and provide a safe haven during times of uncertainty. Such a sit is now with the Trade War.
The Trade War threatens to be a game changer, reshaping the global economic landscape as the US adopts protective policies and will no longer stand for trade arrangements that are not in favour of its own interests.
With a trade deficit that has plagued it for decades, President Donald Trump is now demanding for more equitable positions. InJuly 2018 alone, with the trade war underway,US trade deficit widened by 9.5% to US$50.1bas a result of a sharp fall in export out of theUS. But how would this tit-for-tat tariff game impact property markets around the world?And what should investors be prepared for as the world takes on a somewhat new order? We think the answer lies in that of jobs, currency and a return to protectionism.
As China tariffs hit the USD11.3 billion soya bean market, jobs and income in places such as Illinois, Iowa and Minnesota in US will be affected the most. As long as soya bean remains a necessity, the demand will simply goto other suppliers such as Brazil and Argentina which will benefit from higher demand, assuming there is proper enforcement of the tariffs and currency movements.
Such shifts will affect the markets involved and hence the jobs and incomes of the populace there, leading to upward and downward pressures on property prices accordingly. Shenzhen in China, for example, with their exposure to the US market in technology will come under more pressure as tariffs add to the already convoluted Chinese tax system.
For some, that could be the last straw on their camels’ back. For others who are listed in the US exchanges, their share prices will likely take a beating. This would force companies to rethink their geographical allocation, leading to possibly opposite effects on other technology markets such as Vietnam.
Note that the range of goods under the tariffs extensive, including steel, aluminium, automotive, intellectual property, solar panels, washing machines, computers, fuel pumps, construction equipment, dairy products and even lumber. Such wide range of products means that different markets will be hit on different fronts with different intensities and attempting to come up with nett positions for any market would be quite some work.While some will languish as employment rate falls, some will flourish with new job opportunities created.
As we have witnessed recently, currency led the charge into the uncertainties of the Trade War with expectations of what it might bring, redefining exchange rates around the world. And that leads to two important aspects that property investors should be concerned about -interest rates and capital re-allocation.
As exchange rates fluctuate, governments will be forced to raise interest rates to regulate the selling down of their currencies and manage inflation. For example, a strengthening USD will mean weakening prospects for MYR, hence driving momentum to sell MYR in favour of USD. A weakened MYR will translate to higher cost of imports and therefore inflation. The Malaysian government may then attempt to use carrots (raising interest rates) or sticks (tightening capital out flow) to mitigate such a situation.
While interest rate changes will impact lending and consequently the holding power of property investors, forex fluctuations will impact investors through their equity and foreign currency loans within their portfolio.Investors may want to therefore sell down their assets to defend their wealth against currency depreciation.
China is undoubtedly the 600-pound Gorillain the room when it comes to property. There are hardly any worthy cities in the world where Chinese monies have not made an impact when it comes to property prices. Amongst many reasons, a strong push factor for theChinese to want to venture out is the fear of the depreciating RMB.
Weakening of the RMB in theory increases China’s competitiveness and bolsters its economy given its export-heavy nature.However, it can also risk capital flight – a situation we witnessed in Indonesia during 1997/98 which the country continues to struggle with even today. Despite strict capital control measures, money continues to find its way out of China and a weakening RMB can accelerate that process, draining China’s capital reserves and putting additional pressure on its debt ridden market. Given that a controlled currency depreciation is one of the hardest feat to perform, managing such a situation is a tight rope exercise for the central bank.
An outflow of capital will likely mean that many countries will continue to attract the same capital into their housing market. And depending on how these markets are being managed, that can be a positive or negative experience – something which each market will have to decide for themselves.
A trade war has many inevitable effects -much of which are hard for the academics to precisely forecast as there will be too many unfathomable considerations in play including the unpredictability of the POTUS. But one thing for sure, when the going gets uncertain, many of the larger countries will hunker down and turn defensive rather than aggressive on the trade front.
The first question on every economic leader’s mind would certainly be how can one defend itself against such an economic hurricane, and subsequently how can one exploit the opportunities created at this stage of uncertainty.
While some might still think that the protectionism that US is going through is but a result of the current president, we think that he is but a reflection of a much longer term opinion of the population. In other words,
the changes might be here to stay for quite a while, along with the tension with its trade partners from China to Europe, from Canadato Mexico. This might mean a recalibration of industries, jobs and currencies; and short of turning the Trade War into a real physical war, we might be seeing the early stages of a new norm for the global economic landscape.
While property investors will have to manage their investments well given the turbulences of currencies and interest rates, the good news is residential property will likely remain one of the least affected markets, in our opinion.We will not venture to say the same for commercial and industrial sectors which will, if anything, be more volatile.
ASEAN, in our opinion, would in fact stand to benefit as a whole, given its position as an alternative location and source of products, and of course, the fact that we are well under the radar of the tit-for-tat exchanges. We suspect that only countries that are highly dependent on global trade vibrancy such asSingapore will be of concern.
However, a wild card in the whole exercise, which is at the back of every economist’s mind, would be the fact that while China might be on the losing end when it comes to balance of trade with the US, the fact that it holds close to 20% of all US treasury notes and hence is the United State’s largest creditor means that its power over the US dollar cannot be underestimated. When pushed to a corner, it can slow down the buying of US treasury bonds or even flood the market by selling them and through that force US to act.Such a delicate balance, while effective to hold both parties at bay, can mean world chaos if it breaks down.