I’m so bearish I’ve sold my house, says Cantor’s Tan
17 August 2014
The analyst at Cantor Fitzgerald says that the global economy faces a downturn similar to 2008, and wants as little exposure as possible to risk assets as a result.
Tan, an investment companies analyst at the broker, told FE Trustnet earlier this week that he was becoming increasingly bearish on financial markets, and was buying risk-averse investments as a result.
However, he’s gone a step further than most, selling his apartment in July and moving his profits back to his family in Singapore over fears of a global economic downturn.
Tan’s principal concern is China. The analyst says that the slowing economy, crackdown on corruption and the changing attitudes towards real estate among the country's homebuyers makes China’s expensive property market look susceptible to collapse.
Given China’s position in the global economy, that contagion will likely spread, he says.
“I fully appreciate I could be early on this, but when I look around and take everything into account, I think now is the right time to be cashing in. As the saying goes, ‘you will never go broke taking a profit’ – I might be early, but I’m not going to go bankrupt locking in a profit,” Tan (pictured) said.
Although slowing, Tan says China’s growth rate is still unsustainable due to years of over-investment, symbolised by the amount of unoccupied space within some of the country's “ghost cities”.
Most experts agree that China’s growth will slow as the authorities rotate towards a consumption driven economic model, but Tan is concerned that people are underestimating the dangerous knock-on effects this will have.
The first issue, Tan says, relates to the China’s new anti-corruption legislation.
He says that during the years of strong economic growth, there were widespread instances where local officials would take a cut from developers for awarding extensive building contracts and the safest, and least traceable, way of investing that capital was into real estate.
Tan says this has driven and propped the market up, but with the country cracking down on corruption, that flow of investment into real estate – which currently makes up 20 per cent of Chinese GDP – will start to slow.
Tan says that isn’t necessarily a problem in itself, but as supply/demand is so out of kilter in the country’s interior following years of over-investment, and as prices in the likes of Beijing and Shanghai are already well-above the average salary, it could cause a devastating snowball effect.
“Once the property market starts to slow, a lot of these assets will be liquidated so that individuals can prop up their own businesses. The problem, when the market starts to fall, everyone is going to rushing for the exit at the same time,” Tan said.
So, why has that led him to sell his property in Canary Wharf? Tan says that unlike in Canada, Australia and other hotspots for Chinese investment, London hasn’t yet implemented protective tariffs such as higher stamp-duties.
If China’s overheated property market does result in a full-blown crisis, Tan says that Chinese investors are far more likely to liquidate their assets further afield to protect their families or businesses.
Foreign investment has been one of the major drivers of London’s property rally in recent years, and exiting Chinese investors could cause house prices to fall significantly in London and beyond, he says.
The government are taking some measures to stop this distortion, but Tan thinks the damage has already been done. Indeed, he hasn’t just stopped at selling his property.
Due to his concerns about the impact China’s property collapse would have on the world’s economy, he has sent his capital back to his parents in Singapore dollars.
“Once again, I think the UK is very much geared into the global economic cycle. If the world craps out, like we saw in 2008, the central banks can either let the economy go or they devalue the currency. I think it is going to be a race to the bottom,” he said.
“In the last crisis I lost 30 per cent of my purchasing power in pounds relative to the Singapore dollar. It might be just because I have been scared by this before, but I’ve sent it home where my parents are.”
Performance of currencies in 2008
Source: FE Analytics
Tan admits he is in a privileged position as he made a profit on his property. He also fully accepts that there will be a lot of people who disagree with his view.
Bulls on China say that its government and central bank are well-aware of the threat Tan highlights and will do whatever is necessary to stop a property-induced economic downturn.
Tan sympathises with this view, and though there is anecdotal evidence that steps are being taken, he thinks their intervention could exacerbate the problem.
“The local government authorities are already telling developers to stop lowering their prices to prevent a sell-off in the market,” he said.
“That concerns me. It’s like the law of unintended consequences – it may be done with the best intentions, but if you prevent the market from working, then you will just create one big event later down the line.”
The other option, of course, is that the authorities step in and flood the property market with liquidity.
“If you prevent the market from working, it will inevitably come back and bite you at some stage.”
Tan says that any form of Chinese economic stutter would create problems for financial markets.
Given that the likes of the FTSE and S&P 500 have ripped upwards since the market bottomed after the last crisis, risk assets are now more susceptible to any bad news.
Performance of indices since Mar 2009
Source: FE Analytics
Tan says that there are already signs that the “smart money” is preparing for some form of downturn.
“Smart money starts to cash out when the goings good and valuations are high, but that also tends to coincide with a market peak,” Tan explained.
“One example was with Blackstone, the US private equity group, in 2007. They IPO’d that year and I speculate that they did that to lock in capital. Why would they need to raise money in the public market? They did it because people were willing to pay above and beyond what they knew they could generate going forward.”
Tan says that hedge funds such as Brevan Howard and Third Point raised capital via closed-ended funds – which don’t face redemptions – in 2007, to lock-in capital.
He says history looks like it’s repeating itself.
Pershing Square, a hedge fund group run by the notorious manager Bill Ackman, came to market this week.
“These guys are very, very smart and they are fully aware investors are bullish. There is a lot of money looking for a home and valuations are attractive.They are looking forward and realising that now is a good time to lock in money for a rainy day,” Tan finished.
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