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Mike Keogh

US Market Update: Tapering talk and favoured real estate markets

​There are encouraging signs that despite the impacts of higher tax and sequester cuts in public spending, the US economy is preforming resiliently. So what can one expect in the second half of 2013? Michael Keogh (Senior Investment and Economic Analyst) discusses the output projections in H2 2013.

​There are encouraging signs that despite the impacts of higher tax and sequester cuts in public spending, the US economy is preforming resiliently. The Bureau of Economic Analysis (BEA) have revised up their second quarter estimate of annual growth to 2.5%, boosted by stronger business investment, a rise in consumer confidence, manufacturing orders and employment. Total non-farm payroll employment grew by 195,000 and 162,000 in June and July respectively, sufficient to edge unemployment down to 7.4%. And the housing market has continued its upswing in activity and construction with the S&P/Case-Shiller 20 City Home Price Index up 12% year-on-year.

So what can one expect in the second half of 2013? The US recovery has arguably been rather lethargic given the magnitude of the adopted monetary and fiscal policy. However, output projections in H2 2013 are looking more encouraging, enabling growth of 1.8% in 2013, accelerating to 2.9% in 2014. Evidence of sustained expansion would normally have rallied markets, but not now, with financial markets reacting to expectations that the Fed will shortly begin to “taper” its bond purchases. Whilst this does not translate into policy tightening, it has pushed up treasuries to 2.7%, their highest rate in two years, whilst 30 year fixed mortgage rates have risen above 4%. This is insufficient at present to dampen a, albeit uneven, housing recovery, but it has hurt house builders stocks, re-iterating the rhetoric that the normalization of monetary policy will have to be very tactful and gradual as to not undermine the consumer recovery. With that in mind, monetary stimulus in some limited form of monthly bond purchases should continue into 2014, with interest rates likely untouched until 2015. Buoyed by this belief, real estate investment volumes are likely to remain healthy, underpinning present cap rates.
In terms of favoured US property stocks, these include apartments, student housing, and medical offices, all of which have very attractive spreads over treasuries. With competition for core properties fierce, apartment opportunities now lie outside the gate-way cities, in centres well positioned for the economic rebound. In expectation of a recovery in residential development, investing where the underlying fundamentals are robust and where potential structural changes in the market place will not erode wealth is paramount for quality orientated purchases, leaving more optimistic return targets to outside the top-tier markets. At the broad level, US house prices value remain far short of their 2006 high and with buoyant investor demand and tight inventories, Moody’s Analytics forecast that the Case-Shiller Housing Index will record average annual home price gains of 4% from Q2 2013 to Q2 2018.