In Brief: More US Millionaires & More From ECB

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Weekly Broker Wrap: US millionaires multiplying, inflation in China and Japan; ECB rate cuts; unaffordable housing in the USA; and tracking technology software.

-Superior output from the US millionaires factory
-Inflation aint the same in China and Japan
-ECB to trump the US on rate cuts
-Home affordability issues in the USA
-Investors crowding in ASX software companies

By Mark Woodruff

Food for thought: quote of the week

Former President Donald Trump “wouldn’t feel too secure if I was [Taiwan]” and questioned why the US was acting as Taiwan’s “insurance” when, he claimed in an interview with Bloomberg, they had “taken” American chip business.

Dear Reader: If you find any interesting investing quotes that spark the creative investing juices, email them to info@fnarena.com with your name, if you are happy to be published alongside the quote, with a brief sentence on why you think it is great.

The US millionaire factory

“Money is better than poverty, if only for financial reasons” once stated Woody Allen.

Around 22 million American millionaires (or 6% of the population) would undoubtably agree, which is 50% more than the combined total of their counterparts in China, France, Japan, and Germany, according to new data presented by Stocklytics.com.

From the beginning of the century until 2023, the total number of millionaires (measured in US dollars) globally increased to 58m from 14.7m, according to the UBS 2024 Global Wealth Report, and the US accounted for nearly 40% of the number. Second-ranked China, with a much larger population, had only six million millionaires in 2023.

Reasons put forward by Stocklytics’ writer Jastra Kranjec for the rapid increase over the past two decades are: globalisation; a booming technology industry; expanding financial markets; rising real estate prices; and growth in emerging market economies.

Over 3.5 million Americans will join the millionaire club by 2028, according to a survey within the UBS Wealth Report. China and Japan will add 500,000 and 800,000, respectively, by 2028, and France, Germany, and Canada can hope for around 400,000 new entrants each.

Suffering from relative impoverishment, the United Kingdom will have to endure a projected -17% decline by 2028, according to the survey, or around -500,000 fewer millionaires than in 2023.

Opposing inflation scenarios in China and Japan

Morgan Stanley anticipates consumption growth will stay weak in China but gradually improve in Japan, noting consumer spending is a key factor for each country’s growth outlook.

By way of background, the broker explains Japan is going through a structural shift to a moderate sustainable rate of inflation from low-flation, whereas China is up against a persistent deflation challenge. 

Over the period 2013-17, Chinese nominal GDP growth was averaging 9.1% as compared to 2% in Japan, which contrasts with nominal GDP growth (year-on-year) in the first half of 2024 for each country of 4.1% and 2.1%, respectively.

So far in Japan, imported inflation has cut into real wage and consumption growth, but the broker anticipates stronger wage growth with moderating inflation will lift real wage growth. Temporary tax cuts are also expected to support near-term consumption.

On the other hand, deflationary pressures in China continue to weigh on nominal GDP, and weak corporate returns are pressuring wage growth, observe the analysts. Spending on high-end goods is also being weighed down by wage cuts in the finance, property, and technology sectors, while property price declines are also driving households to pay down borrowings. 

In adopting policies to defend GDP growth by keeping investment ratios (excessively) high, China is experiencing declining overall returns for the economy, highlights Morgan Stanley.

Consumer sentiment in China has weakened further due to rising job and income concerns and the ongoing decline in house prices. Wage growth could decelerate further as deflationary pressures persist, suggest the analysts.

From the September quarter in Japan, Morgan Stanley believes real consumption growth will turn positive on a year-on-year basis as inflation transitions to “good” (price hikes backed by wage hikes) from “bad” (driven by rising import and input costs).

ECB to trump the US on rate cuts

“We wanted to have greater confidence that inflation was moving sustainably down toward our two percent target and what increases our confidence in that is more good inflation data and lately we have been getting some of that,”.

So stated Federal Reserve Chair Powell earlier this week while speaking at the Economic Club of Washington, when pressed on whether the FOMC would lower interest rates.

While the groundswell for interest rate cuts grows in the US, it appears momentum will be greater on the European continent.

Following the ECB’s June rate cut, Oxford Economics expects a further -200bps of European Central Bank loosening by the end of 2025 in a marked divergence with US Federal Reserve policy.

By contrast, the US Federal Reserve is expected to start its easing cycle in September and limit policy easing to -150bps of cuts.

Oxford’s forecasts, based on activity and inflation forecasts, are also supported by Qvigstad’s criterion, which points to policy rate divergence at least as large.

This oft-quoted criterion by previous central bankers suggests tighter policy may be warranted if an economy is expected to run hot, with inflation above target at the same as economic activity is above normal levels. Equally, it suggests superior outcomes could be achieved with looser policy where an economy is expected to run cold.

While the surge in inflation in recent times is relatively unusual from a historical perspective, Oxford’s current ECB policy rate assumptions broadly align with the evidence from previous comparable periods of disinflation.

Either of two potential risk scenarios to Oxford’s baseline forecasts (a Full-blown Trump presidency and higher-for-longer interest rates) point to the highest level of divergence between the ECB and the Fed since the inception of the euro.

Rather gloomily, a full-blown Trump presidency is defined as the economy being hit by heightened protectionism, elevated interest rates, and a weakening US economy amid curbs on immigration and fading fiscal stimulus.

Under the “Higher-for-longer interest rates” scenario there is a protracted period of high interest rates that weighs on stock markets and house prices, resulting in tighter credit conditions and several years of sub-par growth, explains Oxford Economics.

Home affordability issues in the USA

It seems the cost of everything housing-related has made home buying historically unaffordable in the USA.

Home price growth will likely moderate slightly, but still remain positive, leaving housing affordability at historical lows, according to Oxford Economics’ proprietary US Housing Affordability Index (HAI).

Renters (particularly) from among prospective first home buyers, are finding the costs involved out of reach due to elevated mortgage rates, high home prices, and rising costs for property taxes and homeowners’ insurance, explains Oxford. Low affordability has also contributed to lower rates of home ownership for younger households compared to their predecessors.

Based on data from the American Community Survey, run by the US Census Bureau, Oxford points out the median income of renter households is typically about two-thirds of the median income of all households, and just over half the median income for homeowners.

While this median income for existing homeowners makes home buying still affordable, there is a strong incentive not to move, as most homeowners with a mortgage have rates well below market rates.

Coming up with a 20% deposit for a home can also be a stretch for renters. Oxford points out a Federal Reserve Survey of Consumer Finances conducted in 2022 showed median financial assets of US$5,000 for renters compared to US$100,000 for homeowners.

In a salient point, Oxford notes delaying home ownership also delays the wealth accumulation which historically follows home ownership.

While the HAI was slightly better in the first quarter of 2024 by comparison to the record low in the last quarter of 2023., Oxford is only expecting a minor affordability improvement later in 2024 and during 2025, via lower mortgage rates once the Federal Reserve begins cutting interest rates.

Tracking technology sector numbers

Wednesday’s rally in WiseTech Global ((WTC)) shares (brought undone yesterday, perhaps by the food for thought quote above by Trump) may partly be explained by the same-day release of proprietary UBS June maritime data.

The volume of container ship entries into North America, Europe, and Asia all increased by 7.9% year-on-year.

This growth continues May’s momentum of 8.1%, points out the broker. The first week of July showed activity growing by 4.3%.

As part of further software tracking, UBS notes US downloads continue to accelerate for Zip Co ((ZIP)), trending 14% higher following May’s 10% increase. While supportive for the Zip investment case, a simultaneous trading update and capital raise appeared to spur the nearly 12% share price rally yesterday.

For Xero ((XRO), UK and US app downloads improved over June and market share gains were achieved in Australia, highlights the broker.

June-ending UBS Quant crowding data for Australian Software companies show long crowding positions increased month-on-month for WiseTech and Xero, while positions for Zip Co declined.

WiseTech led the crowding increase, yet the company’s shares are still the “least” crowded (or most shorted), with Xero the “most” crowded, explains UBS.

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