Home loans surge fuels hopes for recovery

Jonathan Armitage, the head of American large cap equities at Schroders, says mortgage applications in America have hit a 30-year high. This is a sign that a recovery is in sight.

Statistics from the American Mortgage Bankers’ Association shows a surge in applications for home loans as consumers react to the federal government’s fiscal stimulus, said Armitage at a conference in New York.

“This is a direct response to the government trying to bring mortgage rates down. It may be short term, but to us it is a pre-cursor to a recovery. Existing home sales seem to have stopped getting worse. It may be too early to suggest a floor, but data across a number of points show the rate of deterioration slowing down,” he added.

He also points to relative strength in American corporates, with free cash flow yields being the highest seen since the early 1950s in large caps.

Armitage and his team also say history tells us that markets bottom 12 months into a recession, while analysis from the National Bureau of Economic Research says the recession began in December 2007.

“If you are using history as a guide, we see equity markets will trough at the end of this year or early next year after seeing falls of around 50%, the worst falls since the Great Depression.”

Armitage is buying across several sectors and is, in particular, investing in railroad companies and areas of consumer-related stocks.

Elsewhere, Andrew Yeadon, the head of multi-manager, says monetary and fiscal stimulus will lead to a recovery in Britain in late 2009 or early 2010. But he says recovery prospects depend on the banks and whether the stimulus is passed to the end consumer.

“The chancellor of the exchequer has made it quite clear that the banks need to pass on the mortgage rates. If the central bank does not get what it wants, a full nationalisation has not been ruled out,” says Yeadon.

Schroders’ forecasts have changed drastically compared with three months ago. Yeadon says they are given with a lot less confidence, as everything is so cloudy, although he thinks the Treasury is being too optimistic. The house view is that British economic output will drop by 2% next year.

Natalie Kenway was a guest of Schroders in New York.