Wednesday, August 20, 2014

Marc Faber: Hong Kong Real Estate Shares Attractive, Hold US Treasurys The mainland Chinese market, represented by the CSI 300, is up nearly 10 percent in the past month. What do you make of the recent surge in China A-shares? Are they a legitimate way to invest in China?

Marc Faber : I've written about this before. There are several reasons Chinese stocks are rising. First of all, there's a huge pool of money that is floating around Asia. It's Japanese, Korean institutions, Singapore, sovereign funds and so forth, and all the accumulated wealth among individual investors, which is very sizable nowadays.

Year-to-date, the markets that performed best were India, Indonesia, Thailand, Vietnam, the Philippines and I think Pakistan. These markets are up something between 15 and 25 percent. The money now looks at these markets and their valuations and the slowdown in economic growth in Asia, and they are aware that there are plenty of problems in China. But they also see that the Chinese market has grossly underperformed all the other Asian markets, and global investors see that the Chinese market has underperformed Europe and the U.S. So purely from an asset allocation point of view, money's flowing into China.

The second reason is that the government implemented austerity measures initially. They also have this anticorruption drive which slows down economic activity very meaningfully. In some ways they got scared, so they're easing monetary conditions. This easing of credit conditions has really pushed stock prices up.

The market in China—if you look at the last five, six years—has very little correlation to the U.S. or to other markets. It is conceivable that in a global market decline, Chinese stocks could actually rise.

What I argued for, for some time, is that the property market in China is weakening. In Hong Kong, property prices are down a little bit after having risen like crazy in the last 10 years; they're down a little bit over the last 12 months. But property stocks in Hong Kong all sell at discounts around 40-45 percent to net asset value.

In other words, real estate prices would have to drop something like 30, 40 percent to really hurt the developers from a longer-term perspective. Of course, if property prices drop 30 percent, the stock prices of property developers will also go down somewhat, but not by 30 percent, because the market may have already discounted a lot of the future declining prices.

There are not many things I like in this world of inflated asset prices. But I'm just saying, if you want to play easy monetary policies in China, I think that Hong Kong shares are as good as anything else. As I said, some real estate companies I find reasonably attractive.
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Marc Faber is an international investor known for his uncanny predictions of the stock market and futures markets around the world.Dr. Doom also trades currencies and commodity futures like Gold and Oil.

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