Faber: Hong Kong Real Estate Shares Attractive, Hold US Treasurys

August 19, 2014

Marc Faber is the editor and publisher of "The Gloom, Boom & Doom Report" and the founder of Marc Faber Limited, an investment advisory and portfolio management firm, based in Hong Kong. Nicknamed "Dr. Doom," he is a famous contrarian investor known to scope out deeply depressed and overlooked assets. Dr. Faber has authored several books, including "Tomorrow's Gold: Asia's Age of Discovery." Widely followed by institutions and retail investors, he appears regularly on CNBC and Bloomberg TV.

Dr. Faber recently sat down with ETF.com to discuss China's recent stock market surge and the sectors he finds attractive for a Chinese reflation. He also tells us why he prefers to hold Treasurys in the near term, and the three depressed assets that are on his radar.

ETF.com: 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.

ETF.com: The last time we spoke, you liked the Hang Seng Index. Does that still hold true?
Faber: Yes. The Hang Seng Index, from the low, has risen quite sharply. I didn't measure it precisely, but I think it's something like 15 or 20 percent from the lows. I like it obviously less after this move, but I explained repeatedly in my report that the Hong Kong market is closely correlated to the Chinese stock market. In other words, China goes up, Hong Kong goes up.

ETF.com: Recently the U.S. stock markets had a pretty sharp pullback. Do you see this as the start of that 20-30 percent market kind of plunge that you've been predicting for this coming fall?
Faber: I don't think that the pullback has been substantial. Now, it is true that it has been substantial in some stocks, but by and large, the market, after having risen for five years in a row, since March 2009—and some indices are up three times—the recent decline of something like 4 percent on the S&P and 7 percent on the Russell 2000 is a very tiny decline.

Having said that, from a very-near-term perspective—say, 10 days to one month—as of Thursday night of last week, the market has become very oversold, with only 20 percent of the shares on the New York Stock Exchange trading above the 50-day moving average. That is a short-term, very oversold condition.

If we talk about long term, then we're not oversold, because there's still 58 percent of the shares of the New York Stock Exchange that are trading above the 200-day moving average. To get the fully oversold position in the markets, you would have to have maybe only 20 percent of shares trading above the 200-day moving average.

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