China watch….it’s only just begun
China’s property slump appears to be deepening. It might not be on the front pages of our papers nor leading the business radio and TV reports but efforts in recent weeks to kick-start housing sales are failing.
Local governments, from northern cities like Tianjin (see figure 1) to southern urban centres like Nanning (see figure 2) – the capital of South China’s Guangxi region – appear to be failing in their efforts to prop up the market.
Figure 1. Tianjin
Figure 2. Nanning
The downturn has thus far resulted in a 9.9 per cent drop in housing sales by value, nationwide. More concerning for the price of iron ore and Australia’s economic growth numbers, Chinese housing construction starts have fallen 24.5% over the first four months of 2014 compared to the same period last year.
In one anecdotal example cited by The Wall Street Journal, an apartment that sold for 14,000 yuan per sqm in 2012 is now being offered by developers for 25 percent less. In another anecdotal example of increasing competition for developers, an apartment owner has tried to sell her apartment for three years without success.
According to some real estate agents, the current malaise is different to the downturn in 2011. Back then buyers saw the slump as an opportunity, enquiring about ways to circumvent restrictions on buying second or third properties. Evidently, there are no such enquires today.
As property investment directly contributes 12 per cent to GDP and more than 20 per cent if salaries and output from related industries is included, the deceleration in the industry is of great concern to Australia.
In response, the central government is encouraging banks to lend more and restrictions on home buying and lending have been eased again.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Peter Murphy
:
Hi Roger,
Thanks again for your helpful insights and commentary about China. As a novice who tries to read and understand as many reports that focus primarily on the value theme I just wanted to ask the question is there ever a time that a value oriented fund manager would go to all cash or very high percentage cash?
I note that in this weeks video insight that you say (correctly) there is no correlation between economic activity and the stock market and and therefore stocks may go higher as more QE is unleashed.
I ask this question as a lot of material now suggests that the current valuations of share markets around the world are at or nearing all time highs in terms of valuation on a historical basis. This comes at a time when the economic forecasts on the whole are not that good or at least would not rationally seem to support such lofty valuations. As an example I note the World bank has today downgraded global growth from 3.2 to 2.8% and warned of a China hard landing. I also note other major world economies such as Japan and Europe face significant headwinds.
The valuation methods which I refer are the cyclically adjusted CAPE, tobin’s Q and Warren Buffet’s Market Cap to GDP and seem to be the most widely methods to measure the market from a value standpoint. For the US market at least these valuations are at levels only ever seen just before the 2000 tech boom and above other times where the market has gone down substantially.
Whilst you are correct in your assertion that the market may indeed go higher, these valuations also imply that over a 10 year time frame commencing now that prospective returns are likely to be very low – would now not be a good time to preserve capital?
Regards,
Peter
Roger Montgomery
:
Yes. The Montgomery [Private] Fund can go to 100% cash. The Montgomery Fund can go to 50% cash or more on occasion too.
Ric Ric
:
And yet again amidst all of the commentary regarding China, those who bought into Chinese banking shares are showing some recent good returns. Fortunately, or unfortunately I have pretty much no friends in this sector at the moment.
Momentum traders have only got on the bandwagon because of recent price movements.
“Value players” haven’t gone near the sector because of the black box of their book value (even though I have stated that unlike their US counterparts, the big 4 chinese banks don’t have much in the way of material intangibles).
So when the whole market is against you, both value and momentum, then doesn’t that truly provide a ‘unique’ investing opportunity.
Anyway I am happy to date, all my Chinese bank share positions are in the black and I look forward to some very very nice dividends (with a 30% payout ratio).
The only downside for me, is that I don’t get franking credits
garry howlett
:
Hi Roger,
Maybe not in the T.V reports, but the 3 minute weekly insights probably getting more views than channel 10.
More serious though, do you still favour a bearishness for the $AUD after the most recent data? Would it be fair to say that this would put downward pressure on the $AUD if it plays out as you expect? thanks
Roger Montgomery
:
Still have majority of cash in foreign currencies.