A lot of commentators have been making the case the China's
real estate market is in a huge bubble. That may or may not be
the case, but what's more salient is to what extent the bull
market will hold this year.
Earlier in 2012 I published
on Emerging Money making a comparison between China real estate
stocks and U.S. homebuilders, and noting that there was a
possibility for a strong move in China's stock market because of
strong outperformance that expressed itself in the sector back
The thesis got reversed unfortunately, when China announced it
intended to target a lowered growth rate of 7.5%, which in turn
had various ripple effects in the way commodities and emerging
markets have behaved relative to the U.S. stock market.
And while China's stock market has dragged down sentiment
towards investing overseas, real estate stocks continue to hold
up relatively well. Take a look below at the price ratio of the
Guggenheim China Real Estate ETF (
) relative to the iShares FTSE China 25 Index Fund (
). As a reminder, a rising price ratio means the
numerator/TAO is outperforming (up more/down less) the
There certainly has been tremendous outperformance relative to
broader China market averages in real estate stocks. This should
be seen as a big positive, since this indicates that investors
are betting that property may be on the comeback trail.
The caveat is investor fear over a shift by the world's second
largest economy away from being so export-driven to being more
domestic and consumer-oriented.
I still maintain the idea that China has a strong chance of
being a strong performer this year as reflation persists, but
investors likely have to fully digest (and overreact) to the
possibility of a hard landing first, before believing in a better
growth environment to come.
Michael A. Gayed CFA
for Emerging Money.
Pension Partners, LLC
, and/or its clients may hold positions in securities mentioned
in this article at time of writing. The commentary does not
constitute individualized advice. The opinions herein are not
personalized recommendations to buy, sell or hold