Thanks To China Seattle is experiencing a very bullish period – ValueWalk Premium

Thanks To China Seattle is experiencing a very bullish period

A common view in travel circles is that you can’t get a feel for a place unless you spend a few weeks there. I disagree, though.

Often, spending just a day or two in a city or country gives me insights into a place that TV and newspapers can’t deliver. Just walking around, soaking up what is happening and talking to a few people – including the ubiquitous cab driver – can give me information and a feel for a place very quickly.

A recent visit to the U.S. confirmed this view. I spent a few days in San Francisco, California before heading to Seattle, Washington – both on the west coast of the U.S. – to speak to students at the University of Washington. Here are four things I learned while I was there…

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1. The U.S. regulatory framework for cryptos still seems to be a mess at this stage

While I was in San Francisco, I caught up with friends and business colleagues. A good buddy, who has been active in various areas of the technology world for a long time, took me out to Palo Alto to an event digging into various aspects of the crypto and blockchain space.

A couple of weeks before my U.S. visit, I chaired a closed-door round table session in Hong Kong where the stock market’s key regulator presented a session dealing with the regulation of ICOs (initial coin offerings) and cryptocurrencies. At this session, I raised the question of what makes an ICO an event to be regulated by the securities regulator. The answer from the regulator was quite clear. Any ICO that offers investors/buyers the rights to any income stream, dividend, coupon, shares or interest in a business is something that is viewed as a security and therefore needs to be approved and governed under the rules for listed securities and other collective investment vehicles.

If the ICO offers no such interests, then it is viewed by the securities regulator as a commodity and not something that comes under the securities rules.

I did not find this same clarity in the lengthy discussions on the subject at the Palo Alto event, which was brimming with lawyers and industry practitioners. The U.S. is more advanced than most places when it comes to the crypto and blockchain space, but the regulatory framework seems to be a mess at this stage. No one seems to know which branch of the regulatory labyrinth is or should be in charge. One branch suggests that ALL ICO’s  – no matter what flavour and types – are securities, which should come under securities rules. Others seem to be suggesting an approach similar to that taken by the Hong Kong securities regulator. And there are all shades of grey in between.

Whether you are a believer in cryptocurrencies or not, clarity on the regulatory framework needs to be put in place, and quickly. But so far there seems to be no clear pathway to achieve this in the U.S. Things are perhaps a little more advanced on this score in countries such as Japan, Hong Kong, Singapore and parts of Europe.

2. There’s no euphoria about the U.S. equity market… yet

In San Francisco I also met up with friends in the asset management business to get their take on equity markets. I was fishing for some views or insight that I had not heard before in respect to the U.S. equity market, its valuations, drivers and directions. The response to my probes was very simple. A shrug of the shoulders and the comment “earnings are very good, beating expectations in many instances”. That was the end of story – no theories on valuations, expensive or otherwise. No intellectual debate about future trends. Just a simple assessment that seemed to suggest that corporate America is in pretty good shape. More of the same is expected in the short term.

Is this complacency? I don’t think so. I have known these folks for a long time and complacency has never been part of their makeup.

This is just one totally anecdotal data point (and I certainly don’t read too much into it), but it’s a slightly bullish one. Equity euphoria typically comes right before a correction. This quasi-indifference would suggest the bull market still has some legs left yet.

3. Thanks to technology and Chinese capital, Seattle is experiencing a very bullish period of jobs, economic growth and real estate

It had been more than a year since I had been to Seattle. During my last visit I was left with no doubt about the impact that Chinese money is having on the city, its businesses and particularly its real estate markets.

That has not diminished in the intervening period. We’ve written in the past that the Chinese are voracious buyers of foreign real estate. Cities like Auckland, Vancouver, Sydney, London, and San Francisco have seen huge waves of Chinese money come in acquiring residential real estate. Seattle is no different.

But what has changed is the crane count, and the traffic! The city of Seattle has routinely been at the top of the population growth tables in the U.S. for some years now. The population of metropolitan Seattle has increased by almost 40 percent over the past decade.

I was also told that retail giant Amazon has plans to build between 12 million and 13 million square feet of new floorspace in Seattle. Social media giant Facebook is apparently planning approximately 5 million to 6 million square feet. And tech giant Google is planning on building about 1 million square feet. Just by way of comparison, London, arguably the biggest financial centre globally, has built an average of around 4 million square feet of space each year. The numbers in Seattle, a city half the size of London, are impressive.

And of course, all that commercial space will be occupied by workers who will need housing.

Seattle has already been amongst the cities with the greatest increases in residential property prices in recent years. The latest data from the Standard & Poors Corelogic Case Shiller index, a leading measure of U.S. residential real estate prices, tells us that home prices in Seattle are rising faster than any of the other 20 main cities in the survey. Last year’s 11.3 percent rise is almost twice the 5.7 percent average for the 20 cities in the survey. And that follows a 12.3 percent increase in the year up to early 2017. So the market is already tight.

One exasperated University of Washington faculty member recounted how their family had been outbid three times for various homes they sought to buy – mainly by Chinese buyers.

4. Seattle’s bullish period of jobs, economic growth and real estate is coming at a cost

The traffic problems in the city are noticeably worse than on my previous visits. My colleagues lamented the lack of investment in transport infrastructure. And what is being built is way too little and way too late, with few firm plans to ramp up the supply of mass transit facilities. One wag suggested that the lack of investment is a deliberate strategy aimed at slowing down growth and diverting demand elsewhere. They don’t want this growth and development messing up their lovely city!

To sum up, my was a good reminder of some of the larger growth forces that as investors we should be looking to tap into: Technology trends, Chinese capital flows, and urban growth and its associated impact on real estate prices.


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