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Kootenai Brown

Morgan Stanley Trying To Flog Property Derivatives

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Morgan Stanley is trying to flog this crap to pension funds to meet long term liabilities.

A COMPELLING WAY TO HEDGE LONG-DATED LIABILITIES

- UK Index Linked Gilts are relatively scarce, forming only 29% of total

outstanding UK government debt inclusive of the inflation uplift

- Inflation linked bonds are getting increasingly expensive as buyers enter the

market as inflationary risks increase

(see Financial Times Lex Column 18-Feb-08)

- Longer dated UK Residential Property Derivatives can now be used instead

of RPI linked securities to gain excess returns

- Current pricing of Halifax HPI UK Residential Property Derivatives presents

a window of opportunity allowing portfolios with long-dated, inflation-linked

liabilities to produce excess returns

CURRENT HPI PRICING OFFERS A VERY ATTRACTIVE OPPORTUNITY

- 10 Year HPI currently costs 0.96% per annum (10.0% for 10 years)

10 Year RPI currently costs 3.25% per annum (37.7% for 10 years)

- HPI is currently cheaper than RPI by 27.7% over the next 10 years

- If Investor A had bought Halifax HPI and Investor B had bought UK RPI

exposure over 10 year periods at today’s prices, and compared outcomes

for the periods from Jan-1993 vs. Jan-1983 to Jan 2008 vs. Jan-1998,

rolling monthly, the average outcomes would have been as follow:

- Investor A, buying Halifax House Price Index exposure, would have

generated, on average, an excess return of 75.2% compared to Investor B

who bought RPI

- The current cheapness of HPI contributes to this excess return by 27.7%

- Pricing of HPI vs. RPI is rarely this attractive: investors looking to hedge

long-dated inflation-linked liabilities should consider exploiting the current

window of opportunity

HOUSE PRICE INDEX RETURNS HAVE OUTPERFORMED RPI IN 82.2% OF DECADES IN THE PERIOD 1953-2007

- The Halifax HPI Index started in 1983, however Nationwide produce a similar index with a quarterly history back to 1952

- Over the period 1983-2007, returns on the two house price indices have 90.4% correlation; Chart 4 compares the index levels

- Chart 5 compares returns on Nationwide HPI to returns on RPI over 10 year periods, rolling quarterly

- Absolute returns on the Nationwide House Price Index have been greater than returns on RPI in 82.2% of decades

- The extremely attractive current pricing of residential property derivatives means now is an ideal time to buy HPI instead of RPI

Redemption at Maturity = Notional * HPI Jan 1? / HPI Jan 08

Pray that your pension fund manager has a brain... even a tiny one...

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  • 295 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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