Indexing legend Burton Malkiel says for the over-60 set, high-yielding stocks might be the new bonds.
Burton Malkiel, the Princeton economics professor and author of the index investing classic “A Random Walk Down Wall Street,” is more certain than ever that China’s a great investment, even if its real estate market has been frothy. As an advisor to the China-focused indexing firm AlphaShares, that’s hardly surprising.
What was surprising was when Malkiel told IndexUniverse.com Managing Editor Olly Ludwig that older people focused on income-producing investments might be wise to find their yield in new places, namely emerging market bonds and high yielding blue chip stocks.
Malkiel will take part in the "Inside ETFs Conference" next week in Florida, where he will sit down for a "Fireside Chat" with IndexUniverse Chief Executive Officer and Founder Jim Wiandt.
Ludwig: People are talking a lot about China right now—is it a hard landing or a soft landing? And they’re wondering about towns being built up that have no residents and whether there’s a real estate bubble in eastern China. Can you put it into perspective?
Malkiel: Let’s talk first about the Jim Chanos critique, that they have been building ghost towns, and they’re building bridges and railroads to nowhere. In my view, these projects are a deliberate attempt by the government to bring economic development and some of the riches that have been created in the eastern part of the country to the middle and western parts of the country. And it’s also facilitating the continuation of an enormous migration from the farms to the cities. I think the government knows exactly what it’s doing. There’s a lot of unrest in the center, and there’s an enormous disparity of wealth.
Now on real estate prices, this is actually a very interesting phenomenon; there may very well have been a bubble in real estate prices.
Ludwig: In places like Shanghai, for example?
Malkiel: Exactly. The Chinese are prodigious savers and they basically get zero if they keep their money in the banks. And they have recently focused on real estate. Real estate prices have gone up a lot. The government stepped in to take a number of actions. For example, there’s a 40 percent down payment for buying a house. There’s a 60 percent down payment for buying a second house. And that 60 percent requirement was raised.
They have slapped the wrists of some of the banks that were making a lot of real estate loans. And they have been successful in that real estate prices are down about 20 percent. And they may very well have somewhat further to go. Let’s say you’re a Nouriel Roubini—he’s the current doctor of gloom—who expects a hard landing. The big difference between China and how we got into trouble in the United States was, first of all, the down payments. People in the United States, in general, could buy houses with nothing down. It was heavy leverage and the financial institutions got over-leveraged too. And basically what the Chinese government has done is it has increased bank reserve requirements several times. In fact, the worry that the officials have now is that they may very well have gone too far. And probably the next policy moves will be loosening.
Ludwig: They already started loosening bank reserves, on that crazy day, Nov. 30, when all those central banks cut short-term lending rates to banks and the Dow went up 492 points.
Malkiel: I think you’re right. And it’s probably at the kind of tipping point where everything is likely to go the other way, where the economy has slowed down. It was a 10.5 percent rate of growth in 2010 and early 2011. Now it’s down to 9 percent, maybe even a bit less than 9. And I think the Chinese wouldn’t like to see this go down below 8 percent.
And even if the government had to bail out some of the banks, which is possible, they’ve done it before—remember that China has a debt-to-GDP ratio of 17 percent. It’s 100 percent in the United States. It’s over 100 percent in Europe. It’s over 200 percent in Japan. They’ve got the wherewithal to change fiscal policy without any problem and to bail out any financial institutions that get themselves in trouble.
There’s one other thing about real estate, which actually makes me more bullish about the stock market. Real estate prices are coming down. As I said, they’re down 20 percent. My guess is the government at some point, if real estate fell another 10 percent, will probably come in and loosen up.
But what this has meant is the Chinese stock market is down the last couple of years. And, while I’m not a market-timer, I think people might say, “Stock prices are now at 8 or 9 times earnings; they’ve fallen a great deal—maybe this is the time to get back in the market.”