Finance

A hidden time bomb? A ‘Big Short’ investor sees financial disaster brewing in housing markets

Published

2 years ago

April 6, 2023

A hidden time bomb? A ‘Big Short’ investor sees financial disaster brewing in housing markets

An aerial view reveals a flooded neighborhood within the unincorporated neighborhood of Pajaro in Watsonville, California, on March 11, 2023.

Josh Edelson | Afp | Getty Pictures

Greater than a decade after a U.S. mortgage meltdown threatened to destroy the worldwide monetary system, a “Massive Quick” investor as soon as once more sees monetary catastrophe brewing in the actual property market.

Dave Burt, CEO of funding analysis agency DeltaTerra Capital which goals to assist shoppers handle local weather threat, was one of many few skeptics who acknowledged the housing market was getting ready to collapse in 2007.

He helped two of the protagonists of Michael Lewis’ best-selling ebook “The Massive Quick” guess in opposition to the mortgage market within the lead-up to the 2008 world monetary crash. Because it turned out, they have been proper and made billions.

Now, Burt believes an ignored local weather threat might see historical past repeating itself.

“I am all the time looking out for these large systemic points and there is a few of causes for that,” Burt advised CNBC by way of videoconference.

“Professionally, if one thing is mispriced, then as an investor, which has been my job for many of my profession, your major alternative so as to add worth is to determine one thing that’s both too low cost to buy on your shoppers or one thing that it’s too costly to promote on your consumer,” he mentioned.

“From a private perspective, and that is partly primarily based on that skilled perspective, I’ve seen when that goes incorrect, how impactful that may be on economies and society and our most weak. And I am actually pondering by the post-global monetary disaster interval right here within the U.S. from 2008 to 2012 the place there was an enormous quantity of human struggling.”

Finally, you’ll hit both a neighborhood or nationwide tipping level the place there may be going to be some sort of bubble that bursts.

Jeremy Porter
Head of local weather implications at First Road Basis

Burt mentioned DeltaTerra Capital’s analysis means that 20% of U.S. houses have “significant publicity” to a mispricing challenge due to flood threat. If realized, he warned the fallout might resemble the extraordinary correction seen through the world monetary disaster.

“We consider this repricing challenge as perhaps 1 / 4 of the dimensions and magnitude of the [global financial crisis] in mixture, however in fact very, very damaging inside these uncovered communities,” Burt mentioned.

His feedback come at a time when the housing market is at present experiencing a serious elementary shift due to larger mortgage charges and as world central banks sustain the combat in opposition to inflation by mountain climbing rates of interest.

In flip, Burt says some cracks are beginning to seem within the phrases of the price of insurance coverage. He famous the restoration in Florida from Hurricane Ian was a difficulty he is watching carefully, significantly as a result of this storm surge uncovered a flood insurance coverage nightmare for householders.

“Will they turn out to be chasms this 12 months? I am unsure,” Burt mentioned. “However an statement of the best frequency elementary information on residence gross sales and residential inventories signifies that issues are undoubtedly going south for these uncovered properties.”

U.S. housing market overvalued?

Whereas most buyers stay skeptical of the affect of local weather dangers on their portfolios, a current examine warned the U.S. housing market might be overvalued by round $200 billion attributable to unpriced flood dangers.

The evaluation was revealed in mid-February within the journal Nature Local weather Change. Authored by researchers from Environmental Protection Fund, First Road Basis and the U.S. Federal Reserve, amongst others, the examine modeled property-level adjustments in flood threat throughout the U.S. over the subsequent three many years and warned that low-income households have been significantly weak to residence worth devaluation.

“The largest motive why it issues from our perspective is that local weather threat is not being priced into the housing market,” Jeremy Porter, head of local weather implications at First Road Basis, advised CNBC.

“The prices now or the valuations of houses do not take into consideration the conclusion of that precise flood threat, and that is not making an allowance for that now we have an incredible quantity of overvaluation hooked up to properties throughout the nation.”

Porter warned that as folks proceed to lack enough local weather threat data when buying their houses, a hazard persists that households might come to lose a big proportion of their property worth in a single day.

“It isn’t that farfetched to say that you simply hit a tipping level,” Porter mentioned. “It could be neighborhood by neighborhood. It could be a bigger tipping level that you simply hit throughout the nation in the actual property market. However ultimately, you’ll hit both a neighborhood or nationwide tipping level the place there may be going to be some sort of bubble that bursts.”

Aerial images present injury on Fort Myers Seaside on March 1, 2023, attributable to Hurricane Ian, which made landfall in late September 2022.

Orlando Sentinel | Tribune Information Service | Getty Pictures

At current, the examine mentioned almost 15 million U.S. properties face a 1% annual probability of flooding, with anticipated annual damages to residential properties forecast to exceed $32 billion.

It additionally warned the growing frequency and severity of flooding amid the deepening local weather emergency might see the variety of U.S. properties uncovered to flooding improve by 11% and common annual losses soar by at the very least 26% by 2050.

“Once you purchase a house, probably the most essential issues is the price of sustaining that residence and I feel so many essential selections are made primarily based on that,” Burt mentioned.

“Finally, till folks have good details about what these climate-related prices are going to seem like, we’re creating new issues every single day. I feel that is actually the crux of the matter.”

Reflecting on the examine’s findings, Jesse Gourevitch, a postdoctoral fellow at Environmental Protection Fund, advised CNBC that the overvaluation was extra widespread amongst lower-income property house owners.

He added that “if worth deflation have been to happen, this very a lot has the potential to widen wealth gaps within the U.S. and exacerbate inequality.”

One other important threat, Gourevitch mentioned, was prone to be the doubtless detrimental results on native authorities tax revenues as a result of the full income for municipalities sometimes depends closely on property tax revenues. “And having that tied to a bodily asset that’s uncovered to local weather change I feel introduces a number of dangers to the soundness of that income stream,” Gourevitch mentioned.

‘A humanitarian disaster’

Removed from a home challenge, Burt pressured the local weather dangers related to the U.S. housing market posed a serious downside for nations worldwide.

“I feel while you begin occupied with these points globally, you begin occupied with the larger implications that actually probably the most uncovered nations typically occur to be probably the most impoverished as effectively,” Burt mentioned.

“It’s extra of a humanitarian disaster while you begin taking a look at this by the worldwide lens.”

TOPSHOT – Aerial view reveals an space fully destroyed by the floods within the Blessem district of Erftstadt, western Germany, on July 16, 2021.

SEBASTIEN BOZON | AFP | Getty Pictures

Munich Re, the world’s largest reinsurance firm, noticed steep financial losses in 2022 because the local weather disaster drove extra excessive climate occasions, equivalent to Hurricane Ian within the U.S. and apocalyptic flooding in Pakistan. Reinsurance refers to insurance coverage for insurance coverage corporations.

It estimated that these losses amounted to $270 billion final 12 months, of which round $120 billion have been lined by insurance coverage. The insured loss whole continues a pattern of excessive losses lately.

“On the finish of the day, somebody has to pay for these growing losses,” Ernst Rauch, chief local weather and geo scientist at Munich Re, advised CNBC. “Regardless of whether or not it’s insured or not, it’s an growing financial burden.”

One space of specific concern, Rauch mentioned, was flash flooding. This refers to a selected sort of flooding by which rain falls so rapidly that the underlying floor can’t drain it away quick sufficient.

He cited the extreme flooding seen in Germany in 2021 which prompted overflowing rivers to devastate cities throughout western Germany, Belgium, Austria and elements of the Netherlands, Switzerland and Luxembourg.

“The sort of excessive native and regional rainfall occasions is on the rise in lots of areas — and they’re underestimated. It’s regardless of whether or not we speak about a typical home-owner in Germany or in different elements of the world,” Rauch mentioned.

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Finance

HSBC and Tradeshift Launch SemFi to Transform Embedded Business Finance

Published

6 hours ago

October 6, 2024

Press Room

HSBC and Tradeshift Launch SemFi to Transform Embedded Business Finance

“Semfi from HSBC (derived from seamless, embedded finance) will embed HSBC payment, trade and financing solutions across a range of e-commerce and marketplace venues, including Tradeshift’s own B2B Network.

“This marks a transformative step in Tradeshift’s ability to deliver vital, value-adding services to our network, tackling a key challenge for businesses: access to liquidity, cash flow management and seamless financial integration within supply chains.

“With Semfi now in the mix, we’re ready to rapidly scale to meet the demand for these services across a broad range of businesses.”

What’s next for SemFi?

Although SemFi will launch first in the UK, HSBC plans to expand the service globally over time. The venture is designed to operate as a technology company rather than a traditional bank.

Clients will be onboarded by HSBC, and the bank’s balance sheet will be used for financing, but the goal is to offer a tech-forward solution that meets the evolving demands of businesses worldwide.

With HSBC supporting 1.3 million businesses globally and facilitating more than US$800bn of trade each year, SemFi is set to become a key player in the world of embedded finance. For SMEs, the ability to access HSBC’s services seamlessly within their e-commerce workflows could represent a significant step forward in efficiency and growth.

Finance

Emerson Electric Co. (EMR): Strengthening Market Position with Financial Confidence

Published

13 hours ago

October 5, 2024

Press Room

Emerson Electric Co. (EMR): Strengthening Market Position with Financial Confidence

We recently published a list of 10 Wonderful Stocks to Buy Now at a Fair Price. In this article, we are going to take a look at where Emerson Electric Co. (NYSE:EMR) stands against other wonderful stocks to buy now at a fair price.

In H2 of the year so far, there are signs that the S&P 500 index has been broadening beyond technology leadership and the index is reverting to a more normalized state. This means that there are several high-quality stocks outside of the popular names and investors are required to be diversified. This diversification should not be limited to the style level, but also to the stock level. Market experts opine that the AI theme has largely fuelled the narrow market. This concentration, along with an increase in passive investments, resulted in a significant cycle of consensus positioning and stretched valuations. This led to the vulnerability in the market, which resulted in a sharp correction in July and early August.

As per Fidelity International, when it comes to passive investing in the S&P 500, it demonstrates nearly a third of holdings in only 7 stocks. Considering their dominance, a stumble in performance means the index will see a significant impact, and the investors have already seen some mega-cap technology names that are unable to deliver on strong expectations.

S&P 500 Index – Transition and Concentration

The US equities saw an outstanding performance in H1 2024, with the S&P 500 Index rising 15.3%, as per ClearBridge Investments (A Franklin Templeton Company). The investment firm believes that solid earnings results and fiscal stimulus mitigated the influence of higher interest rates. However, the headline performance numbers, aided by a ramp-up in mega-cap stocks and, more specifically, semiconductor leadership, eclipsed the recent signs of deterioration below the surface.

Since the Mag 7 stocks have disproportionately driven earnings growth over the previous 2 years, ClearBridge Investments expects a rebound in earnings among small-cap stocks in the upcoming 12– 18 months. The investment firm believes that small-cap companies have seen the impacts of higher rates. In 2023, profits for Russell 2000 companies declined ~12%. This year, they are up ~13.6%, and for 2025, the projections hover at around ~31%. If this happens, there might be a broadening of the market which should provide an opportunity for active managers.

Opportunities Apart from Magnificent Seven

Companies that are unable to meet hefty expectations might see a disproportionate sell-off, and the stocks riding the wave of AI might be significantly exposed considering the amount of capital deployed versus the uncertain future environment. Given such trends, Fidelity International believes it is unsurprising that so far in H2 2024, there have been signs that the S&P 500 is broadening beyond tech leadership, with some non-tech sectors surpassing the broader market.

There are abundant high-quality stocks apart from the popular names. This means that dozens of companies in the S&P 500 continue to offer a return on invested capital (ROIC) and earnings growth of more than 30%. This is true for several other quality metrics, reflecting an underappreciated depth of opportunity in the broader US equities.

While diversification remains critical, even looking beyond the Magnificent Seven might not necessarily offer the required diversification considering that the US market remains heavily weighted towards growth sectors like IT. As per Fidelity International, diversified portfolios need negative correlations between assets, but few styles provide consistent negative correlations to quality growth companies. That being said, cyclical value and defensive value remain 2 key exceptions.

To get a negative correlation, the investors are required to avoid an overlap at the stock level. As of now, the US market provides a range of attractive stock opportunities that offer this valuable diversification.

As per ClearBridge Investments, the top 5 stocks now constitute ~27% of the S&P 500 and the top 10 make up ~37%. As per the investment firm, this concentration might stagnate near current levels, with mega caps delivering solid, but slower, earnings growth in comparison to the recent past. The investment firm expects that diversified portfolios should outperform in the upcoming 12–18 months.

With this in mind, we will now have a look at 10 Wonderful Stocks to Buy Now at a Fair Price.

Our methodology

We first sifted through multiple online rankings and ETFs to identify quality stocks with wide moats. Next, we selected stocks that were trading at a forward P/E of less than ~23.65x (since the broader market trades at a forward multiple of ~23.65, as per WSJ). The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Engineers analyzing a complex network of process control software and systems.

Emerson Electric Co. (NYSE:EMR)

Expected Earnings Growth: 23.4%

Number of Hedge Fund Holders: 51

Forward P/E Multiple (As of September 30): 18.45x

Emerson Electric Co. (NYSE:EMR) is a technology and software company, which provides various solutions for customers in industrial, commercial, and consumer markets.

Emerson Electric Co. (NYSE:EMR) has a wide economic moat, which is mainly based on switching costs, and on brand intangible assets. Moreover, the company’s strong geographic presence and diversified customer base further solidify its moat. Emerson Electric Co. (NYSE:EMR) remains confident in its financial health and strategic initiatives. The company continues to focus on integrating National Instruments and potential share buybacks.

The company expects its backlog to increase YoY as it enters FY 2025. Emerson Electric Co. (NYSE:EMR) has been adjusting its strategy to focus on growth areas like innovation and renewable energy investments while, at the same time, managing softer segments. Therefore, Wall Street analysts are optimistic about the company’s future performance and its strategic positioning in the global automation market.

The company sold its remaining interest in the Copeland joint venture, hinting at the fact that Emerson Electric Co. (NYSE:EMR) is focusing on simplifying its portfolio. It highlighted that demand in process and hybrid markets, which is being led by a constructive capex cycle, has been meeting expectations. In Q3 2024, its operating leverage performance exhibited the benefits of its highly differentiated technology. For 2024, Emerson Electric Co. (NYSE:EMR) anticipates net sales growth of ~15% and operating cash flow of ~$3.2 billion.

Redburn Atlantic initiated coverage on 8^th July on the shares of the company. It gave a “Buy” rating and a $135.00 price target. Insider Monkey’s Q2 2024 data revealed that Emerson Electric Co. (NYSE:EMR) was part of 51 hedge funds.

Overall, EMR ranks 7th on our list of Wonderful Stocks to Buy Now at a Fair Price. While we acknowledge the potential of EMR as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than EMR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’

Disclosure: None. This article is originally published at Insider Monkey.