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.

ETF.com: Do you still see an eventual sharp sell-off in the markets later this year?
Faber:There has been significant technical damage in several stocks and several groups. Whereas the consensus is for a strengthening economy in the second half, and further strength next year, looking at the performance of the bonds market, one would conclude that the bond market is suggesting renewed economic weakness.

What investors may overlook is, maybe the U.S. is strengthening somewhat, but at the same time, Europe is basically weakening. All emerging economies are not strengthening, but rather weakening. So I would be very careful in making a statement that the global economy's healing—I don't see that at all.

ETF.com: If the stock market does take a plunge, where do you see this global pool of liquidity rushing to? Will it flow back into Treasurys, as it has historically on sharp market pullbacks?
Faber: That is a very good question. I think I mentioned before, in our last interview, I still own 10-year Treasurys, which I bought last November when the yield went to 3 percent. Now the yield is at 2.42 percent. So it's been a well-performing asset class. In particular, long-term bonds, 30-year bonds have performed superbly in the U.S. They are up this year something like 14 percent, year-to-date, compared with 12 percent for the S&P and the loss of 2 percent for the Russell 2000 and the Dow that is flat.

I think that if the market went down substantially, then Treasurys could easily—on the 10-year—fall below 2 percent.

ETF.com: So do you think that Treasurys remain a good hedge against a sharp market sell-off?
Faber: My asset allocation is essentially real estate, equities, bonds, cash and gold. I think that it would be a mistake at this stage to sell all the bonds and all Treasurys and put everything in the stock market.

It's not that I think that Treasurys are good value from a long-term perspective; that I doubt. Because the maximum you will earn on your 10-year Treasury will be 2.42 percent each year for the next 10 years. That's not a very high return. But it could be—in a period of six months or one year—a better return than to lose money on other asset classes.

ETF.com: Africa's been in the news recently. President Obama has been touting Africa's growth potential, and recently committed $33 billion in new investments last week. Are you interested in any investments on the African continent?
Faber:Africa is a resource-based economy. There are investments flowing into Africa, mostly into resources. There are, however, huge problems. South Africa is over-indebted. The African Bank just went bust, basically. That tells you something.

Ghana has huge problems as well, because they had this resource boom and it came to an end. In the meantime, imports surged and they have huge trade and current account deficit. It's simply not problem-free. It's been on the radar screen of many people, and some stocks have gone up a lot.

I would say it's not a region that interests me for now. I had investments in Africa in the early 1990s, but I don't have any at the present time. In fact, I'm a director of some mining companies, and they have assets in Africa, in the Democratic Republic of Congo and in South Africa.

ETF.com: You have a knack for looking at out-of-favor markets that aren't on the average investor's radar. Are there any now that jump out at you anywhere in the world?
Faber: Yes. The two asset classes that are truly depressed are gold mining shares and coal shares. Also, Russia is depressed. The gold shares, GDXJ, is up 40 percent this year. But it's still down something like 70 or 80 percent from the previous high. We're kind of building a base in gold mining shares and in gold. So if someone asks what is a cheap asset class, then I have to say that is now an asset class that is inexpensive.

ETF.com: You had mentioned GDXJ, a junior gold miner ETF. Do you prefer to own gold miners through the majors or the junior miners?
Faber: I prefer to play a rise in gold prices through physical gold, which I own. But I accept the fact that gold mining shares became extremely inexpensive. Now, the big groups—like Newmont and Barrick—have become a highly leveraged play on gold. If gold goes up, these stocks can go up a lot because they have very high levels of debt.

There isn't a huge difference anymore whether you own small gold miners, gold mining exploration companies, or whether you own Newmont and Barrick. If the price of gold drops below $1,000 and stays there, both the small exploration companies and the Newmonts and Barricks of this world will have big financial problems. If gold prices rise, the exploration companies, the juniors and the likes of Newmont and Barrick will appreciate in price.

ETF.com: Last quarter, you told me that your top contrarian play at the moment was cash. You advocated keeping up to 25 percent in cash. Does that still hold true, or do you have a new contrarian play?
Faber:I still like cash. Markets haven't done particularly well in the last three months. A lot of markets are down 10 percent in just two weeks; a lot of stocks are down. So I think it's a time to hold some cash, yes.

ETF.com: Thanks for your time.


Guggenheim China Real Estate (TAO | C-30)
Faber thinks that property stocks in Hong Kong (HK) are depressed. He believes in playing China's easy-monetary-policy-induced reflation through HK real estate stocks. Fortunately, there's an ETF—TAO—that fits Faber's view to a "T." For 70 basis points, TAO holds roughly 50 real estate companies and REITs from both HK and China. In fact, HK companies make up roughly 80 percent of the fund's weighting. True to Faber's statement, TAO carries a value bias with a low trailing P/E of 7.23. The fund sports a portfolio yield north of 3.5 percent, to boot. Caveat emptor: TAO is a relatively small fund, with $20 million in assets, and trades only $120,000 a day, at 29 bp spreads, so careful trading is warranted.

Market Vectors Gold Miners (GDX | B-63)
Faber highlighted gold mining shares as being "extremely inexpensive." While he prefers owning physical gold, he views both major and junior miners as leveraged plays on gold. GDX has established itself as the de facto way to play the major gold miners, such as Newmont and Barrick. The cap-weighted fund holds 40 of the largest miners that list their shares in the U.S. Canadian miners currently make up roughly 65 percent of the fund. GDX tends to trail its index by only 42 bps on most 12-month stretches. GDX is a powerhouse in the space, with more than $8 billion in assets and trading over $800 million a day, at pennywide spreads.

ETF.com Alpha Think Tank ETF Tracker

Methodology: ETF selections are made solely by ETF.com. They are neither selected by, nor are they investment recommendations from, Alpha Think Tank strategists. ETF selections are made by the ETF.com Analytics team based on the themes highlighted in each weekly interview with Alpha Think Tank strategists.

We implement a stop-loss of 10% from the ETF.com Pick Date, whereby any funds triggered by that stop will drop off the tracker. The tracker data is updated weekly and is subject to change, according to our ongoing interviews with our strategists.

Ticker Fund Name ETF.com Pick Date TR % (Since Pick Date) TR %
(1 Yr)
Closing Price $ (8/14/14) Inspired By
INDA iShares MSCI India 2/24/14 26.72 35.04 30.55 Roubini
GXC SPDR S&P China 2/3/14 19.98 17.16 82.35 Rogers
EWW iShares MSCI Mexico Capped 3/3/14 19.31 3.93 70.76 Friedman
AMU ETRACS Alerian MLP ETN 1/27/14 17.81 24.24 33.14 Luskin
PXH PowerShares FTSE RAFI Emerging Markets 2/17/14 15.71 13.87 22.03 Arnott
MCHI iShares MSCI China 4/15/14 15.62 15.04 50.92 Faber
GDX Market Vectors Gold Miners 3/31/14 14.93 -4.58 27.13 Merk
INDA iShares MSCI India 4/9/14 13.10 35.04 30.55 Kotok
EWW iShares MSCI Mexico Capped 2/11/14 12.38 3.93 70.76 Fitzsimmons
GMF SPDR S&P Emerging Asia Pacific 4/9/14 11.57 18.78 87.85 Kotok
CCXE WisdomTree Commodity Country Equity 3/14/14 11.51 11.52 31.55 Schiff
EWY iShares MSCI South Korea Capped 2/24/14 10.43 19.27 66.51 Roubini
GULF WisdomTree Middle East Dividend 3/10/14 9.74 33.41 23.79 Dorsey
EWH iShares MSCI Hong Kong 4/15/14 9.17 16.11 22.15 Faber
IEMG iShares Core MSCI Emerging Markets 4/28/14 8.98 13.69 53.30 Luskin
DBB PowerShares DB Base Metals 5/8/14 7.98 -0.17 17.19 Gartman
NKY Maxis Nikkei 225 2/3/14 7.48 6.58 17.69 Rogers
BKF iShares MSCI BRIC 5/22/14 7.23 14.41 40.29 Arnott
EWP iShares MSCI Spain Capped 1/27/14 6.52 24.88 39.64 Luskin
ELD WisdomTree Emerging Markets Local Debt 2/17/14 6.47 2.88 47.14 Arnott
EWJ iShares MSCI Japan 3/3/14 6.10 5.31 11.95 Friedman
KOL Market Vectors Coal 5/8/14 5.94 3.84 19.62 Gartman
VNM Market Vectors Vietnam 4/15/14 5.76 21.58 21.93 Faber
CHIQ Global X China Consumer 3/17/14 5.34 3.01 15.00 Yardeni
VTI Vanguard Total Stock Market 4/28/14 5.16 17.95 101.26 Luskin
BAB PowerShares Build America Bond 4/9/14 4.72 12.83 29.66 Kotok
RSP Guggenheim S&P 500 Equal Weight 3/10/14 4.47 18.80 76.09 Dorsey
FXA CurrencyShares Australian Dollar 3/14/14 4.03 3.78 93.26 Schiff
EIDO iShares MSCI Indonesia 5/28/14 4.00 -0.99 29.11 Fitzsimmons
EWS iShares MSCI Singapore 5/5/14 3.72 7.48 13.92 Bremmer
DBJP db X-trackers MSCI Japan Hedged Equity 6/12/14 3.45 9.85 36.86 Roubini
IEMG iShares Core MSCI Emerging Markets 6/12/14 3.18 13.69 53.30 Roubini
GDX Market Vectors Gold Miners 7/30/14 2.49 -4.58 27.13 Schiff
FXC CurrencyShares Canadian Dollar 3/14/14 1.86 -5.07 91.19 Schiff
CHIQ Global X China Consumer 2/11/14 1.28 3.01 15.00 Fitzsimmons
AFK Market Vectors Africa 5/5/14 1.12 15.98 33.49 Bremmer
MUB iShares National AMT-Free Muni Bond 7/16/14 1.00 9.47 109.29 Kotok
EWP iShares MSCI Spain Capped 2/24/14 0.87 24.88 39.64 Roubini
RSX Market Vectors Russia 2/3/14 0.86 -5.84 24.62 Rogers
EPOL iShares MSCI Poland Capped 3/3/14 0.77 4.05 28.81 Friedman
XLU Utilities Select SPDR 4/9/14 0.67 12.78 41.81 Kotok
EWI iShares MSCI Italy Capped 1/27/14 0.62 14.50 15.46 Luskin
USDU WisdomTree Bloomberg US Dollar Bullish 4/15/14 0.60 N/A 24.95 Faber
SCPB SPDR Barclays Short Term Corporate Bond 3/17/14 0.54 1.67 30.77 Yardeni
VTI Vanguard Total Stock Market 6/10/14 0.33 17.95 101.26 Friedman
INDA iShares MSCI India 7/23/14 -0.10 35.04 30.55 Bremmer
ROBO Robo-Stox Global Robotics and Automation 3/3/14 -0.14 N/A 26.92 Friedman
VHT Vanguard Health Care 7/2/14 -0.34 24.55 113.42 Yardeni
EIDO iShares MSCI Indonesia 7/23/14 -0.61 -0.99 29.11 Bremmer
FXA CurrencyShares Australian Dollar 7/9/14 -0.83 3.78 93.26 Merk
EWP iShares MSCI Spain Capped 3/10/14 -0.97 24.88 39.64 Dorsey
VIS Vanguard Industrials 7/2/14 -2.51 18.89 102.02 Yardeni
FXB CurrencyShares British Pound Sterling 7/9/14 -2.75 7.23 164.15 Merk
FXE CurrencyShares Euro 3/31/14 -3.07 0.43 131.86 Merk
SIVR ETFS Physical Silver 7/30/14 -3.40 -9.09 19.61 Schiff
EWL iShares MSCI Switzerland 6/24/14 -3.41 10.99 33.19 Dorsey
ITA iShares U.S. Aerospace & Defense 5/5/14 -3.59 19.72 105.73 Bremmer
WEAT Teucrium Wheat 8/5/14 -3.87 -22.22 12.67 Gartman
ERUS iShares MSCI Russia Capped 5/22/14 -4.47 -8.56 18.77 Arnott
DBC PowerShares DB Commodity Tracking 3/14/14 -4.57 -5.19 24.84 Schiff
DBC PowerShares DB Commodity Tracking 3/31/14 -4.90 -5.19 24.84 Merk
DBGR db X-trackers MSCI Germany Hedged Equity 2/24/14 -4.92 8.05 24.50 Roubini
IAU iShares Gold Trust 3/14/14 -5.07 -1.93 12.72 Schiff
TUR iShares MSCI Turkey 6/10/14 -8.19 -6.38 54.23 Friedman
EZU iShares MSCI EMU 6/12/14 -8.28 9.75 39.19 Roubini

Data as of 8/14/14


Find your next ETF

Reset All