Transcription
Hello everyone, welcome back to the second segment of "Stock Market C". I still have Mr. Shi and Tommy beside me. Welcome to both of you. This segment, we will discuss the topics of interest rates and the property market. Let's start with the US. The inflation data for June was just released at 3.5%, with a faster-than-expected slowdown. Expectations for interest rate hikes have also cooled down. However, Federal Reserve Chairman Powell stated that although the June data is better, the road to combating inflation is still long. What do you two think of their tougher stance?
Originally, I thought the inflation data for the three months from June to August would fall. In fact, the June inflation data has fallen faster. This is because the increase in rent prices is now very small, less than 2% on an annualized basis. This is due to significantly fewer new immigrants. Secondly, the wage increases for job changers are now very small, around 3.7%. Normally, job changers would expect a 10-20% increase. If people are still changing jobs for only 3.7%, it means inflation actually has room to fall. Just a week ago, the US-Iran conflict reignited. So, you can see the average oil price in July. The average WTI oil price in the US for July is now $80. The average for June was around $85. In April and May, it was $100. In fact, oil prices have fallen by more than $20. Naturally, inflation should fall a bit. Now, the chance of an interest rate hike is really hard to say. I don't think there will be a hike in September because looking at the inflation data for June, July, and August, it doesn't seem like it will spike high. There is still about a 50% chance of a rate hike in December. Mr. Shi, how do you see it?
I also originally expected the US-Iran war to cool down. One reason is that they signed a 14-point peace agreement. The agreement fully shows that the US does not want to fight. If the US doesn't want to fight, logically, Iran also needs to recuperate. However, due to mutual distrust, "You go first," "If you go, I'll follow," "You're not going first," "I'm not going either." As a result, under mutual suspicion, any friction leads to escalation. Iran attacked some merchant ships, and they retaliated. Originally, after the fighting, they immediately said they wanted to restore peace. However, Iran's hardliners used the funeral of Khamenei to say that blood must be repaid with blood and that Trump must pay with his life. This has made the atmosphere increasingly tense. Now it seems Trump has notified Congress, preparing for a new round of war. The decision-making power for the US to go to war originally lies with Congress. However, the president, for national security, can initiate war himself in an emergency. But he must gain congressional support within 60 days. He is now saying that the previous 60 days have passed, and he has secured a peace agreement, so that round is over. This round is new. But the problem is that both the Senate and the House of Representatives have previously passed resolutions asking Trump to withdraw troops. In fact, Congress has already indicated that they don't want you to fight. Now you say you will make the decision for the second round yourself, which may be challenged by others in the future. Also, anti-war sentiment in the US is very high. So, I personally feel that Trump is just "showing off his teeth" and trying to appear strong. He also said before that he would beat people back to the "Stone Age." Things he couldn't do before, will he be able to do them this time? I believe the chance of fighting this time being more severe than last time is very low. One reason is that US military equipment has been used up significantly. Before, they had to dismantle missile and radar systems in South Korea and take them back. If they were to fight, they also talked about sending ground troops. That's easy to say. I think they will have to sit down and talk afterwards. However, during this period, oil prices have risen slightly, and people feel that inflation might be coming. But before, when oil prices were over $100, there was no interest rate hike. At that time, people were still nervous. Now, as the situation gradually becomes clearer, I believe that the market's expectation for interest rate hikes has already produced an effect similar to an actual rate hike. However, interest rate hikes cannot suppress oil prices. Interest rate hikes are effective when the economy is overheating. So, I personally believe that Powell will inherit what Trump said before: "Whoever wants to be the Federal Reserve Chairman must agree not to raise interest rates with me." The US actually needs a low-interest-rate environment. The US government faces the constant need to borrow new debt to repay old debt. The interest on old debt is low. If the interest on new debt rises a bit, it's already high. Old debt, on average, is around 1% plus, and now it's close to 4% plus. The monthly interest expenditure is becoming heavier. So, from the perspective of the US government, they actually don't want to raise interest rates. Therefore, I personally believe that the Federal Reserve's rhetoric is very hawkish right now, but I think their tone can change. If the situation on the battlefield eases a bit during this period, I think they might change their tune after the fourth quarter, and I don't think it can be completely avoided. So, regarding whether there will be an interest rate hike this year, I will reserve judgment and observe.
I agree. If we look at inflation in June, July, and August without this renewed US-Iran conflict, there would be no interest rate hike this year because the trend of inflation is downward. When Powell took office, he also said that whether to raise interest rates or not is another matter. My most important focus is on bond yields. The current 10-year bond yield is at a high of 4.6%. The US government's fiscal spending is very worrying. Powell publicly states that inflation is under control at 2%. This is a superficial statement because there are many inflation indicators. The Federal Reserve uses the Personal Consumption Expenditures (PCE) price index. He actually said it might be better to change it to a "trimmed-mean" method, which removes extreme values. If we take a trimmed PCE, the Dallas Federal Reserve Bank released the 12-month figures, which are now 2.4%. If he moves the goalposts, he can do so at any time. He now says there are five special working groups studying these data. Perhaps by the end of the year, he will move the goalposts. Mr. Shi also mentioned earlier that Trump must have TACO. Does TACO have any signs? I think there are some. I just heard that on Friday, he will give a speech about the congressional elections. Some speculate whether he will say that China interfered in the 2020 US elections. Clearly, before every US election, they play the China card. Let's first set aside Iran. This opportunity also exists.
Listening to both of you, the chance of the US raising interest rates this year might not be as high as imagined. Will this also be of some help to the Hong Kong property market? In previous episodes, we discussed residential properties. How about commercial and industrial properties this time, Mr. Shi? In the first half of this year, commercial and industrial properties in Hong Kong saw an increase in transaction volume but a decrease in prices. Transactions increased by 15% compared to the second half of last year, while transaction value decreased by 7%. Can you share with us the latest situation of commercial and industrial properties?
The situation for commercial and industrial properties is slightly worse than the residential market. It's more than just slightly worse. The residential market has rebounded strongly, while commercial and industrial properties can only be said to be brewing a bottom. Why the increase in volume? Because owners are starting to face reality and are willing to reduce prices more aggressively. Previously, the yield for commercial and industrial properties was only two to three percent, but now it's up to four to five percent. Also, for retail spaces, some businesses like McDonald's, which are in the retail industry, are selling their properties. There are also companies like JD.com coming to Hong Kong, not just online retail, but also opening physical stores. Now, appliance stores like Fortress and Broadway might be facing greater impact and may require less retail space. Additionally, there were rumors that ParknShop was also considering selling its stores, although they clarified that they were not. In reality, the impact of online shopping on the retail industry is profound, and in some areas, it may not have been fully reflected yet. Therefore, people are not daring to have overly high hopes for the future. In such a situation, some owners are willing to make sacrifices to cash out. Now, it's because prices have fallen too much that people are willing to buy. They are willing to sell at the price of next year's decline, not the current price. This is the situation for retail spaces. Office buildings are slightly better. Recently, stock trading has been more active. Hong Kong has become a leader in IPOs. Asset management is also doing better than Switzerland. Some people in the financial industry have made money. Therefore, in the most core areas, in the highest-end office buildings, they are renting and buying. Of course, foreign companies mostly rent, while some Chinese companies buy. The best batch is starting to be absorbed. Rents are bottoming out, meaning in prime locations. If we talk about Kowloon Bay or Cheung Sha Wan, there might still be some pressure, but you can see that developers are reducing prices significantly. Now, I see a tendency for both retail spaces and office buildings to return to core areas. There is no vacancy in core areas, rents are stable, and investors have a clear idea of future valuations in these areas. For example, if before it was 3%, now it's 5%, they dare to buy. Therefore, I believe that commercial and industrial properties are also starting to brew a bottom. If more capital comes out for investment, banks' attitudes will also be better. Mainland China may still need time to digest the damage caused by Hong Kong's real estate to the economy. The worst situation has passed.
Mr. Shi mentioned that one of the factors affecting commercial and industrial properties is the attitude of banks. Tommy, some analyses previously suggested that banks are very unenthusiastic about mortgages for commercial and industrial properties, not only not helping but also "taking back umbrellas in the rain." Is this still the case? Are non-performing loans in Hong Kong banks still so high, with some figures suggesting up to 200 billion? Will they continue to close the door?
Regarding non-performing loans, there have been signs of improvement recently. You should be able to see this in the financial results announced in the second quarter by companies like HSBC and East Asia. Fitch Ratings, in early July, upgraded Hong Kong's property sector rating from the lowest to neutral. Banks are still neutral. If they know you are a speculator, they may not be so eager to lend to you. However, if you are a small or medium-sized enterprise genuinely interested in buying, I think it is much more relaxed now. Mr. Shi previously said, "Banks should take a brave step." Banks have actually reached a certain point, and I would say they are close to the bottom. Previously, because of past problems, they tightened too much. When property prices were high, you might have felt that borrowing half was already the limit. Now that property prices have fallen by more than half, it means borrowing at a quarter of the previous price. Many customers cannot bear this. Therefore, I believe that the tighter they chase, the more they pressure them to cash out quickly. At this time, if they are willing to cash out, they won't get a good price. If you force them, they can't repay you, or they repay less. It's better to give them some leeway and assist new investors to come in. The most effective way to improve the balance sheet is through property appreciation, not by taking money to compensate. If prices rise, everyone benefits. Therefore, some people have suggested that previously the mainland government would acquire non-performing assets, package them, and sell them to funds to remove the pressure from the banking system, allowing the market to recover faster. However, the Hong Kong government now, I believe, thinks the problem is not significant and does not need to intervene. Because intervening in this way will always benefit certain people and is not the fairest approach. But if it is really difficult, like the mainland government, they have asset management companies to do these things.
Our time is almost up. Thank you again, Tommy, for coming and sharing your excellent insights. If you, our viewers, like our program, please remember to like, comment, and share. We will see you next week.