Author: Keith Knutsson

The Global Real Estate Market performed exceptionally well in 2017, with yields compressing and prime rents rising above consensus forecasts, rising 0.12% and 1.7% respectively, all while overall volumes increased by 13.2%, the highest level of real estate investment on record. The Industrial sector benefited from low comparable prices as well as new growth opportunities, factors that led to investment growth of 29.5% YOY. Asia captured 52% of the global market, setting a record for the highest share by any continent in recorded history. This influx was felt in the EMEA region where Asian capital increased 95% YOY to a total that remains below investment of North American Investors. Latin America markets are experiencing economic growth from primary and secondary effects of increasing commodity prices.

For 2018, real estate investors are expecting to leverage the positive impact of the technology industry. The growth of the share economy and big data may prove profitable for tech hubs and specialized second tier cities. Despite the continued rise of the “internet-age”, investors believe that location in prime real estate will be of profound importance.  While these locations are already mapped out in the developed world, emerging markets do not have such defined bounds. Gateway cities have proven as a potential common data point for highest growth. Overall, the benefits of economic momentum with risk of global shift in monetary policies are expected to balance results. Real estate will continue to operate as a tool against fears of inflation.

Keith Knutsson of Integrale Advisors commented, “The global economy is at an interesting point past the recession; the performance in 2018 will dictate the performance for supply and demand in the coming years.”

Last week, President Donald Trump announced a plan to set imposed tariffs on steel and aluminum imports further adding a layer of uncertainty on the future outlook of the markets. Tariffs of 25% on steel imports and 10% on aluminum imports will result in a price increase for multiple consumers and slow down growth for many businesses globally. This news could also play a major impact on foreign countries as they might also impose a similar tariff on U.S. exports.

President Trump’s announcement resulted in a decline in the stock market and backlash from global leaders who might have to face the burden on billions of dollars’ worth of U.S. imports. Shares of industrial companies and automakers face heavy headwinds with a sharp decline in share price going forward. The U.S. dollar continued to pull-back against the yen and euro as rumors about a potential trade war created a volatile environment according to Brad Sorensen, managing director of the Schwab Center for Financial Research.

“The market doesn’t like uncertainty. We don’t know if the tariffs will be targeted or widespread, what the foreign reaction will be, or whether this is an opening shot in a battle for tighter trade restrictions or a standalone action designed to send a message in ongoing trade negotiations.”

The biggest question has still been left unanswered because there is no concrete direction the market is headed due to the Cboe Volatility Index (VIX), a measure of market volatility expectations. With the recent news on tariffs and the Fed’s potential short-term rate hikes, the VIX has sparked to a level around 19.59 further implying a 30-point swing in either direction for the S&P 500.

As potential tariffs could impact the job market and change investment strategies going forward; only time will tell if tensions rise between the United States and its foreign trade partners.

BlackRock is stepping up their intelligence research. The hedge fund is setting up a new center dedicated to research in artificial intelligence, placing an emphasis on interest among asset managers in how machine learning can revolutionize the investment industry. The world’s biggest investment group, with $6.3tn of assets under management, is establishing a lab for AI research in Palo Alto, California.

“Research in AI can enhance current investment strategies and accelerate efforts to bring the benefits of these technologies to the entirety of the investment industry” said Keith Knutsson of Integrale Advisors.”

AI has emerged as a topic of interest in the corporate world. Furthermore, the power of modern computers and expanding digital data have allowed for natural language processing and machine learning. Asset management teams are especially interested in enhancing AI as they try to improve the performance of their fund managers, automate back-office functions, and enhance their client outreach by analyzing large amounts of data. Some researchers believe that AI could ultimately replace human fund managers completely.

BlackRock seeks to be on the cutting edge of technology in the world of finance and the setting up of the AI lab, and an internal “Data Science Core” unit announced is part of the company’s technological advancement plan. Included in this plan is the use of investing machines to analyze traffic through corporate websites as an indicator to the future growth of a company. Another technology that the firm uses is text analysis to filter through transcripts of earnings calls, looking for signs of whether a management team is positive or negative about their company’s prospects.

Analyzing large amounts of data with ease opens a world of possibilities for generating alpha. However, traditional techniques must continue to be improved if a firm is to outperform their competitors. The new lab represents a deepening of those efforts to enhance AI in the financial field.

The United State Commerce Department posted GDP numbers at 2.6% on January 26^th for Q4 2017. Those numbers missed Wall Street expectations of 3% but remain much better than the average 2% growth since the early 2000s, and the 1.5% increase in 2016.  The United States has not been able exceed the 3% mark for three quarters in a row for 13 years now, during the George W. Bush presidency. The growth was attributed due to increases in personal consumption expenditures, nonresidential and residential fixed investment, exports, and government spending on the local, state, and federal level. Limiting factors included reduced inventories and an increasing trade deficit; imports and exports rose 13.9% and 6.9% respectively, with rising oil prices having a profound impact on the import numbers.

Consumers and businesses powered the economy to a 2.6% rate of gross domestic product growth in the final three months of 2017. But declining inventories and a wider trade deficit kept the U.S. from hitting the 3% mark for the third quarter in a row for the first time in 13 years. Meanwhile, the Federal Reserve projects 2.5% growth for 2018, and other economists expect short-term growth of 3%. Factors such as an aging population and meager productivity growth remain key factors to subdue additional GDP growth.

Inflation rose 2.8% in the Q4, marking the highest quarterly increase since 2011. While 2.8% is above the 2% goal of the Federal Reserve, the year to year number was under 2%. Investors remain curious whether this development will draw comments from the Federal Reserve.

Equities have experienced strong quarterly results as well. Over 70% of S&P 500 companies beat EPS expectations in Q4, with an earnings growth rate of 12.3%.

Keith Knutsson of Integrale Advisors commented, “consumer confidence, according to the OECD, is at the fourth highest level since the 70s, the unemployment rate is incredibly low considering structural and frictional unemployment, and capital investments carry momentum with the new tax plan – the U.S is looking forward with much strength.”

London is currently the financial center of Europe. However, with recent Brexit negotiations, this is now under threat. Amidst all this, the Bank of England is aiming to retain its status as one of Europe’s most powerful banks.

In December, the Bank of England said it will give commercial banks and big European investment an easy way to stay in London once Britain quits the European Union. It will offer them the same terms that big U.S. and Swiss banks get. It warned, however, that this setup will require deep cooperation between EU and U.K. regulators.

Brexit will affect the financial industry. The financial sectors is a big source of exports to Europe, representing 90% of Britain’s trade surplus in services with the Eurozone. It also provides more than a 10th of all tax revenue in the U.K.

Currently, London’s role in Europe relies on passporting. This allows any bank in one EU country to sell products and services in any other. That is what lets banks from all over the world use London as a base to serve European investors and companies.

The passporting regime will end with Brexit, and European legislators say it is unlikely to ever be replaced by a free-trade deal for services. The Bank of England’s decision can be seen as a gesture of goodwill. It does nothing to actually ensure that Europe will give banks in London future access to the EU.

If London preserves its financial hub status after Brexit is entirely implemented, this could stir up trouble for later. The U.S. and EU are already moving in a different direction by forcing foreign banks to set up onshore holding companies that require their own funding, capital, regulation.

This leaves Britain potentially at a disadvantage when banks fail. Allowing all big banks to operate as branches means that when financial trouble strikes, the U.K. will have no choice but to rely on the cooperation and forgiveness of overseas regulators.

U.S. manufacturing activity slowed modestly for the second straight month in November, but the reading still shows a favorable factory sector. On Friday, the Supply Management Institute said its manufacturing index fell to 58.2 in November, but remained solidly in growth mode. A reading above 50 indicates activity is expanding across the factory sector, while a number below 50 signals contraction.

The slowdown of the sector’s expansion was driven by a decrease in inventories and a slower rate of growth in deliveries from export order and suppliers. Employment growth cooled just slightly. On the other hand, other components of the index showed strength for manufacturing. Overall new orders are rising at faster rate, and production increased.

Recent data shows that the manufacturing sector is on a steady growth path heading into 2018. Furthermore, factories dealing with disruptions due to the impacts of the hurricane season are now back to full production.

According to the U.S. Commerce Department, orders for durable goods are advancing this year at the best pace since 2014. This comes as a result of stronger investment in machinery and equipment by U.S. businesses. The recent recovery in the Energy sector has fueled manufacturing demand as well as demand for capital machinery. The consumer-price index increased 2% from a year earlier in October.

“Currently, demand is prevalent in all sectors. Therefore, the following manufacturing performance should carry forward into the new year” said Keith Knutsson of Integrale Advisors.

The UK’s interest rate hike was viewed as a one-time move despite the statements of the Bank of England. The British pound fell and investors viewed the quarter-point rise as a dovish development. Going forward, will markets be swayed by hawkish talk from the BoE?

Factors that are depressing the possibility of another rate hike include a slowing economy, Brexit uncertainty and retreating inflation. So, despite Ben Broadbent’s stating, ‘We anticipate a couple more rate rises to get inflation back on track,’ markets are seemingly not pricing in more than two rate hikes. While several investors are expecting additional rate hikes to control the 3% year-on-year inflation figure, the high inflation number is mainly caused by a fall in value of the pound. The inflationary impact of a lower pound is transitory and will slowly dissipate in 2018. A better reasoning for more rate hikes should be derived from the tight labor market; the current unemployment rate is at the lowest level since 1975, which will drive future wage growth up.

Keith Knutsson of Integrale Advisors was rather skeptical of such an argument by stating, “while it is very well possible that wage growth picks up looking forward, it has been sluggish despite the shrinking unemployment numbers – real wage growth has actually decreased! What follows is a risk of the economy tilting downside.”

With fears of slowing growth hovering over the Bank of England, it seems unlikely that the rate hikes will occur as presented. An improper approach by the BoE could shift households and businesses towards panic.