Top Four Events Shaping Asia-Pacific Market Volatility in Late 2024
By Esther Ang
Global market volatility has returned in spectacular fashion in early August, sparked by Bank of Japan’s (BOJ) surprise interest rate hike on 31 July, which caused the Yen to spike 8% against the dollar, prompting a major unwinding of the popular “carry trade.” A brutal market sell-off was accelerated by a weaker than expected U.S. jobs report, that also saw unemployment push up to 4.3%. This in turn caused investors to simultaneously believe the BOJ had tightened monetary policy too soon, while the Federal Reserve was too late to start cutting rates, as fears of a potential U.S. recession grew and concerns that the AI bubble is near bursting. Japanese equities reversed year-to-date gains on Monday (5 August), but have since rebounded, with markets lifted by dovish remarks from BOJ Deputy Governor Shinichi Uchida who confirmed the central banks will refrain from further interest rate hikes while markets are unstable. The unwinding of the carry trade, where investors borrow interest-free money in yen to invest in high yielding assets globally, is expected to continue.
Events are a striking reminder of global financial market interconnectivity
1. Interest Rate Hikes by the Reserve Bank of Australia
The Reserve Bank of Australia (RBA) held interest rates at 4.35% for a sixth consecutive meeting on 6 August, the day after the global market sell-off. Governor Michele Bullock admitted near-term risks to inflation, which remains well above the bank’s 2-3% target range, are skewed to the upside, all but squashing the prospect of a rate cut in the next six months. However, bond markets are pricing in a cash rate reduction in December, and a 60% chance of a rate cut at the next RBA meeting in September.
Headline annual CPI inflation rose by 3.8% in 12 months to June, up from 3.6% in the year to March, driven by higher public demand and a recovery in household consumption as real disposable incomes and household wealth rise, boosting domestic demand. Non-discretionary spending, including insurance, education and housing rent, all rose in Q2. The RBA lifted its forecasts for inflation, now expected to reach the target range in late 2025 and approach the mid-point in 2026.
Australia’s battle against inflation has re-intensified this year, driven by a series of hotter than expected CPI prints, robust retail sales and strong job data. The data has prompted the RBA to signal for a potential interest rate hike. At Bullock’s press conference, the governor confirmed the board did discuss the possibility of a rate hike, and said a further tightening could not be ruled out. The governor reminded attendees that the RBA has raised rates far less than its central bank counterparts in this monetary hiking cycle. The Bank of Canada and the European Central Bank both cut rates in June by 25 basis points, while the Bank of England followed in August. Markets now fully expect the Federal Reserve to cut in September.
The potential for another rate hike by Australia’s central bank represents a double-edged sword for its economy and real estate markets. If the RBA resumes monetary tightening while major advanced economies begin to loosen, it could attract an influx of capital into Australian bond markets, strengthening the Australian dollar. For international investors, a stronger Australian dollar increases the relative cost of investing and erodes returns when converted back to home currency. In real estate, rising borrowing costs could further soften international capital flows and reduce debt liquidity, as investors and lenders may shelve plans or redirect investment elsewhere. Additionally, higher borrowing costs may rekindle concerns about debt serviceability among some real estate borrowers, particularly on legacy assets that are not keeping pace with evolving sector-specific occupier requirements, as well as sustainability and technology trends. Tightened financial conditions could weigh on real estate valuations, decrease occupier demand, increase debt costs, and reduce liquidity. Borrowers will need to monitor the availability of credit across property sectors, the composition of active lenders, the impact on loan-to-value (LTV) ratios, and spreads over cash rates.
Australia’s unique position as a mature credit market compared to other APAC nations makes it a focal point for global investors. The duration of the RBA’s potential monetary policy divergence is crucial. The longer and wider the differential persists with international real estate markets, the less attractive Australia will appear to investors on a relative value basis. Conversely, if other advanced economies similarly see an uptick in inflation in the second half of the year, Australia may emerge as a harbinger of a resumed global inflation battle. Investors will watch closely how bond markets and capital allocators respond to a potential RBA hike with this less anticipated scenario in mind. The response to any RBA hikes will be closely monitored, potentially setting a precedent for other markets.
2. Impact of U.S. Presidential Election
In the U.S., President Joe Biden’s withdrawal from the presidential election in November has delivered a twist in the race for the White House that many had anticipated. Vice President Kamala Harris has formally secured the Democratic presidential nomination on 5 August, after securing endorsements from Biden, the Clintons, and Barack Obama, as well as a host of notable Republicans who do not want Donald Trump to return to the White House.
Harris has picked Minnesota governor Tim Walz as her running mate, who has a long and mixed association with China. Walz reportedly taught English in China’s southern Guangdong province in 1989 and 1990, and met with the Dalai Lama in 2016, which may provoke criticism in Beijing. Bloomberg reports his positions on China largely aligned with the Biden administration, including cooperate where possible on climate change, while competing economic and military contexts and pushing back against China’s worsening human-rights record.
Biden’s withdrawal introduces new uncertainty over the future direction of the U.S., extending to international support for the APAC region. Several interconnected geopolitical and economic consequences will cascade from who wins the White House in November. Renewed economic and geopolitical tensions could cause significant shifts in everything from international trade relations to global capital flows, underscoring the interconnected nature of markets and the importance of geopolitical stability. For example, a second Trump administration raises the prospect of resumed U.S.-China trade wars, tariffs, and questions over the U.S. commitment to safeguarding Taiwan’s independence from China.
The working relationships between the U.S., Australia, and China have profound implications for Australia’s economy, including volatility in currency markets and commodity prices. Australia’s geopolitical strategy involves balancing its strong defence ties with the U.S. while seeking to normalise and improve trade relations with China. Any perceived weakening in U.S. support could reduce Australia’s leverage, making it more challenging to navigate its complex relationship with China and potentially impacting its export markets. This in turn, could weaken real estate market stability and soften overseas capital flows, triggering regional liquidity crunches and stifling transactional activity.
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3. Public and Private Markets Valuation Discrepancies
Price dislocation between private and public (REIT) real estate valuations is stark. Public asset valuations reprice sharply and very quickly due to daily trading, while private valuations are much slower to reprice, supported by less frequent valuation requirements. The disparity between similarly priced assets across public and private markets created a raft of opportunities during the height of the pandemic uncertainty.
However, discrepancies between share prices and underlying asset valuations raise questions about the true value of assets and the reliability of current valuation practices. For example, Lendlease, the Australian listed global property developer, saw its share price fall 17% in one day after its annual results on 19 February, due to weaker development revenues and a deteriorating earnings outlook. In extreme market scenarios, Australia’s superannuation funds act as a stabilising force, providing a wave of capital to opportunistically acquire mispriced assets when dislocation becomes exaggerated, and quality assets come to market.
Sustained high interest rates have prevented many private sector funds from bringing assets to market, in part due to the preference to wait for debt liquidity to return, support transactions, and enhance price competition. As borrowing costs loosen throughout major APAC economies – Australia possibly excluded – the environment may tempt private asset owners to bring more stock to market in anticipation of improved pricing relative to the discounts implied by public markets.
The financial year-end in July was also a critical period for REITs, as management boards may look to realise losses in the first two quarters of the new financial year. This “kitchen sinking” strategy can clear the decks of unrealised losses across portfolios and reset boards’ performance expectations from a low base.
4. Recapitalisation Trends
A confluence of market and macro events could accelerate a fresh wave of equity and debt recapitalisations among APAC closed-ended funds over the second half of the year. Equity recapitalisations align investors’ extended investment time horizons and allow existing managers and operating partners to retain ownership and management of prized assets. Single assets and portfolios are transferred into new vehicles upon existing fund expiration, providing opportunities for new equity investors to acquire a stake in infrequently traded assets, sometimes at discounted valuations to intrinsic value. Motivated sellers can also emerge due to the denominator effect, which could resurface in Australia’s monetary policy diverge from global trends. This effect occurs when rapid interest rate hikes cause fixed income and equities to reprice faster than real estate, leading to overextended real estate allocations within multi-asset portfolios and potentially forcing institutions to reduce their real estate holdings.
Debt recapitalisations occur when fund vehicles require refinancing, including routine and distressed situations. In distressed cases, portfolios that have suffered a downward reappraisal may have insufficient collateral value – or be on the borderline – to satisfy debt covenants. Funds that do not proactively seek a refinance risk later being forced into action by equity holders or lenders. This can trigger rights issues and private placements or prompt managers to seek alternative non-bank finance – including mezzanine facilities – which are often more expensive but provide higher loan to value rations (LTVs). In Australia’s highly transparent institutional market, these trends are particularly visible.
Conclusion
The second half of 2024 presents a unique confluence of macroeconomic, political, and market-specific factors that will undoubtedly influence strategic and operational decisions
Esther Ang , Managing Director of Credit and Asset Management in APAC at Trimont, has 20+ years of experience in performing and non-performing loan management, facility agency, security trustee, escrow agent, loan operations and servicing. Ms. Ang is a qualified Chartered Accountant and a subject matter expert in agency, corporate trustee, insolvency and distressed management.
If you have questions about navigating the current CRE landscape, contact us at info@trimont.com.
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