The Bricks & Mortar Report- Sep 11: what the curves yield :: JPMorgan

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 Watch the curves. The shape of yield curves in emerging Asia has
historically been a good predictor of the direction of property stocks in
those markets. In China and India, yield curves are now inverted, a
generally negative indicator for property stocks. Short-term liquidity
conditions appear to be tight for developers in both markets, giving us
pause about becoming more pro-active toward the China and India
property developers. Inflation trends in both markets are likely to be
critical in short-term tactical positioning for the property stocks.
 Developed Asia-ex needs some policy normalization: Real interest
rates in Hong Kong and Singapore are still in negative territory, and
until the market can see a path toward monetary policy normalization,
property stock discounts to NAV are likely to remain wide. Hong Kong
and Singapore developers are trading at one standard deviation below
their historical average discounts to NAV (-32% and -43%, respectively).
 Mostly fear this year. We have drawn on the technical analysis by our
Asia-Pacific Head of Research Sunil Garg and Global Technical Analyst
Michael Krauss to triangulate our fundamental analysis and stock calls.
The FTSE EPRA NAREIT Asia index fear and greed chart has been in
“fear” mode for most of this year, although the daily chart has recently
turned positive. The technical analysis is indicating support levels at
1,450 on the index.
 Country calls – prefer emerging ASEAN. We retain our preference for
emerging ASEAN markets in the region (over China and India), and
between Hong Kong and Singapore we favor the latter, given fewer
structural rigidities and our view that the policy overhang in Singapore is
removed quicker, given greater policy flexibility and a better supplydemand
balance. The value in the Taiwan property sector has increased
meaningfully given the sell-off in the last month, and we keep our
positive stance on this market. Within emerging ASEAN, we continue to
prefer Indonesia (positive structural drivers) and Thailand (on the back of
fiscal stimulus being introduced by new government).


Investment strategy
We have presented above the key fundamental metrics (the shape of yield curves in
emerging Asia markets, real interest rates in developed Asia) we will monitor for the
appropriate turning points, but as yet we do not see any reason for the markets to
reverse the bearish macro-challenged mode it has been in for 18-24months now. The
short-term technical factors (as indicated in J.P. Morgan’s technical analysis) suggest
a "hold" at current levels, with strong support at the 1,450 level on the FTSE EPRA
NAREIT Asia index.
The index has traded in a +/-10% range of the 1,500 level for the past two years now,
and it is difficult to see how the stocks can break out of this trading pattern without a
change in the macroeconomic status quo.
We believe the benchmark Developed Asia index will continue to trade within this
range for the balance of the year. We retain our expectation of a zero price return
from the benchmark FTSE E/N Asia index in 2011.
We prefer emerging ASEAN markets over China and India, and in Developed Asiaex,
we believe the Singapore property stocks should outperform their Hong Kong
counterparts in the balance of the year on a total return perspective. Within emerging
ASEAN we continue to favor Indonesia real estate, as we expect a confluence of
structural factors to propel growth in volumes and raise real estate sector
productivity.