Churchouse Letter
November 2010         by Peter Churchouse

Equity Markets Are Telling Us Something About Asian Hard Assets – Listen

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In This Report:

  • A well established investment maxim suggests that stock price trends discount expected future events in the real economy, industries, sectors and individual companies.
  • Asian property stocks have traditionally been very good at discounting turning points in underlying property assets.
  • Over a long period we find that Asian property stocks, almost without exception, peak or trough well before property prices peak or trough.
  • Typically property stock turning points lead physical property by 3 – 12 months and occasionally by 18 months or even more. Property stocks tend to be more volatile than physical property, underlining the importance of getting the sector call right in property stock investing.

What are property stocks around the region currently telling us about expectations for underlying property?

  1. Government and central bank cooling measures in markets such as Hong Kong, China and Singapore have created cause for pause (or outright correction) in residential developer stocks, and are discounting some potential downside risk in residential prices. So far there is no discernible turning point off the top of recent residential price up-cycles, but stocks are suggesting it is likely.
  2. For Hong Kong and Singapore, performance of investment property stocks focused on office properties, is pointing to solid upside for office/commercial property values.
  3. In Japan a modest, cautious recovery in property stocks suggests the likelihood of a bottoming in commercial property prices is in the offing. The question is when!
  4. For Australia, a tentative recovery in property stocks has occurred, pointing to a recovery in property prices – that has occurred in residential property but is only starting to show signs of recovery in commercial markets.
  5. In Thailand and Taiwan, property stocks are showing no signs of any turning from the current uptrend suggesting likely solid performance of underlying real estate in the short to medium term at least.

It’s Time to Listen to What Equity Markets are Telling Us about Asian Hard Assets

It has been a long held maxim of investing that capital markets are discounting mechanisms. The widely held view that stock, bond and commodity markets price in expectations of future movements in their respective assets classes (and even other asset classes), is core to most investor and trader thinking. Movements in capital markets today reflect the collective views of thousands of individuals as to what economic and political circumstances will do to industries, economies, asset prices at some point in the future.

The reality is that these views of the future can turn on a sixpence. We have seen numerous examples of this even in the past year or so.

How many times have we seen markets discount an inflationary outcome of monetary and fiscal easing that has dominated global economies over the past 18 – 24 months. Then to turn a full 180 degrees to discount a deflationary outcome, the dreaded “double dip”. It was only in July/August of this year that this future economic outcome was dominating market action – taking risk off the table, retreat to high quality, low risk assets such as government bonds. It took a mere slip of a conversation from Fed Chairman Ben Bernanke, which alluded to another round of quantitative easing to turn this deflationary future economic outcome on to its head. Markets did an immediate about turn, and risk was suddenly back on the agenda again, and particularly emerging market risk, discounting a view that suggests that a good part of any QE will find its way into emerging markets where economic prospects are believed to better than developed world economies.

The twists and turns of the “Collective Market Wisdom” are so rapid that markets seem to discount numerous economic outcomes before any outcome is actually in evidence. The chattering classes of rapid fire financial TV (of which many of us have to admit to being a part from time to time) lubricate the wheels of market discounting mechanisms with their rapid dissemination of views and information from the world’s trading floors on an almost hourly basis.

Property Stocks as Discounting Mechanisms for Property Price Cycles

Our purpose here is to examine how and if stock markets in Asia discount turning points in property cycles. We have frequently noted in these columns that property stocks rarely get out of kilter with trends in property cycles for long periods of time. There has rarely if ever been a case of property stocks going up over the course of a property downcycle and vice versa. Hence our long held view that calling the turning points of the property market is a better recipe for success in this sector than focusing on pure stock picking.


No amount of stock picking is going to bail you out of a wrong call on the underlying property sector itself. Stock picking can enhance returns once the sector decision is made however.



Our charts here plot data for a range of longer term property cycles in the region against the respective property stock indices for these markets. The charts aim to show how peaks in troughs in property cycles are reflected in peaks and troughs of property stock cycles. We are able to differentiate between residential property prices and office markets in some of our markets.

For Hong Kong and Singapore, where property markets have proven most volatile, the relationships between stock and property performance are particularly clear.


Almost without exception property stocks peak out or bottom out well before property prices peak or trough. Stock markets have been very good at discounting turning points in underlying property assets.



There are some quite simple conclusions that we can draw from this material:

  1. It is rare for peaks and troughs in property stocks to lag turning in points in the physical markets.
  2. Typically property stock turning points lead physical property by 3 months to 12 months, but on occasion the leads and lags can be 18 months or more.
  3. The lead and lag relationships seem clearer in Hong Kong and Singapore than in some other markets.
  4. There seems to be no discernible difference in the leads and lags off the top of the market or the bottom.
  5. Typically property stocks are way more volatile that physical property, with rises and falls of stocks generally much greater than the value of the underlying assets. Hence, once again, the importance of getting the sector call right in achieving maximum stock upside and minimizing downside risk.

So if stock markets have been so good at discounting turning points in hard assets, what are stock markets telling us right now about property prospects?


Governments, Central Banks in Asia are in Cooling Mode

Almost universally around the Asia region, governments and central banks are imposing a range of administrative, fiscal and monetary measures aimed at reining in rising assets markets, most particularly property markets. Most governments, in hindsight probably over-reacted to the global financial crisis in the immediate aftermath of the Lehman collapse in late 2008. All followed the lead of the US and other European countries with monetary and fiscal easing in a variety of forms. The difference in Asia was that asset prices that fell sharply in late 2008, rallied strongly in 2009 following global (and local) easing measures.

Conventional investment wisdom had it that Asian economies would likely suffer much less than western economies. The result has been the fueling of asset market recoveries in the region not just from domestic capital but also flows from western markets aiming to tap into regions viewed as likely to enjoy better growth prospects in the near term. Hong Kong, China and Singapore have been the markets where the sharpest recoveries in real estate asset prices have occurred, but most other markets have also seen solid recoveries in transaction volumes and prices – Taiwan, Korea, Malaysia, Thailand, Philippines. Even in Australia, residential markets in particular have bounced back following quite brief downside.

Hong Kong – Stocks Suggesting Prospect of Downside in Residential Prices

Both stocks and property prices rallied sharply and almost simultaneously from the early part of 2009 – both residential and office prices recovering in tandem.

However the property stock recovery essentially stalled in the latter part of 2009 and stocks have traded within a reasonably tight range as government jawboning of likely intervention in the residential property market commenced in late 2009, and has continued in 2010 with a range of proposed and actual measures introduced. The property stock index is trading at the bottom of the recent trading range, but there is no real evidence yet of a downturn in physical real estate prices.


Recent performance of property stocks, particularly developer stocks is suggesting that some downside in residential property prices can be expected.



Given the strength of government measures designed to cool the Hong Kong residential market it is hardly surprising that residential developer stocks are trading nervously. This group includes such heavyweight stocks as Sun Hung Kai Properties, Cheung Kong, Sino Land, New World Development.

Hong Kong Property Developers - Stocks Suggesting Risks to Residential Property Market 1974-2010 (Residential Price Index (LHS) vs Poperty Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stock/Property over course of up/down cycle. Constituents: Sun Hung Kai Property, Sino Land, New World Development, Henderson Land, Cheung Kong.
Hong Kong Property Investors - Upside to Office Property Seems Highly Likely 1984-2010 (Office Price Index (LHS) vs Property Stock (RHS). Months Between Stock & Property Peak Trough. % Change in Stocks/Property over course of up/down cycle. HKLand, Hysan, Great Eagle, Wharf, Swire.

…… But Upside in Office Property Looks Very Likely.

The same cannot be said of the commercial property sector. Government is NOT targeting this sector and given the tight supply, solid economic growth prospects and renewed strength in financial services, prospects for the sector look robust. Investment property stocks focus mainly on the Hong Kong office market, and have continued to perform well as developer stocks have been impacted by government measures to cool housing markets.


Office focused stocks are reflecting a positive outlook for commercial property.



This group includes such stocks as Hong Kong Land, Hysan, Great Eagle, Swire and Wharf.

Singapore – Residential Focused Stocks Starting to Roll Over

Singapore’s residential recovery has been extremely rapid and has been met with concerns of overheating by Singapore authorities who have introduced some measures aimed at cooling the residential market. The property sector stock index has reflected very closely the recovery in residential property. Property stocks generally have come off in the past 6 weeks by around 10% or so, but it is difficult to determine if this is the beginning of a sustainable down trend or a downward blip in a longer term up cycle. Latest evidence in the physical property market suggests that the up-cycle of residential prices is beginning to break down.


On balance it probably all points to a downward adjustment to residential property stocks is at an early stage, and therefore pointing to downside risk for residential property prices.



Companies such as Allgreen, Wing Tai, Ho Bee, City Developments, and to some extent Capital Land are residential focused companies.

Like Hong Kong, the Singapore office market is in a different space. Going into the financial crisis Singapore faced the prospect of an office supply surge. Economic recovery has seen this space being absorbed rapidly, and office rentals are now turning upwards.

Singapore - Developer Stocks Turning More Negative Suggests Residential Price Risk 1974-2010 (Residential Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.
Singapore - Office Focused Stocks Showing No Signs of Downturn Expectations 1974-2010 (Office Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.


Office focused stocks and REITs are not showing any real signs of a general downward trend, and the office market itself is very much still in an uptrend with rentals and prices in the early stages of a recovery phase. They are still well below previous peaks and look set to move further to the upside.



This includes such stocks as Capita Commercial Trust, Singapore Land, Suntec REIT.

China – Stocks Reflecting Expectation of Property Market Correction

China’s efforts to subdue a rapidly rising property market began more than a year ago. Property stocks have turned down following commencement of property cooling measure, but property itself has not yet turned down. Volumes of transactions are turning down in some of the larger cities, but so far there is not widespread evidence of broad-based falls in prices.


China property stocks are telling us that asset cooling measures will ultimately work and some downside risk is in the offing for residential property prices.

Given that cooling measures have been in operation for a year now, any sign of a pullback in prices is likely to be met with some overt policy easing, or at least some non-execution of existing policies.

Japan – Cautious Property Recovery Suggested by Stock Performance

Japan’s property stocks have staged a credible recovery since bottoming in 2009 but are still hugely down from their 2007 peaks. In the past couple of months there appears to be growing evidence that property market fundamentals have bottomed and even some early signs of possible upside are appearing.


Stocks are suggesting that recovery in the underlying commercial property market is in prospect – just a matter of when. And given Japan’s record of the past 20 years, recoveries can take some time in coming.


The “Big Three” Japanese property companies with substantial Tokyo office exposure include Mitsubishi Estates, Mitsui Fudosan and Sumitomo Realty, with the major office focused J-REITs including Nippon Building Fund, Japan Real Estate Investment Corporation and Nomura Real Estate Office Fund.

China, Beijing - Stock are Discounting a Correction in Residential Property Markets  2001-2010 (Residentail Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.
China, Shanghai - Stocks are Discounting a Correction in Residential Property Markets  2001-2010 (Residential Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.
China, Guangzhou  2001-2010 (Office Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.
Japan - Stocks Suggest Cautious Recovery in Office Market is Likely, but Timing?  1976-2010 (Office Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle (Property Stock vs Office Price Index.

Australia – Stocks Suggesting Recovery is Around the Corner – But Not a Blow-Out

Both residential and commercial property indices tumbled during the recent financial crisis, commercial more than residential. Stock prices did not just tumble, but “collapse” might be a better description. Residential prices have made a quick and powerful recovery, and commercial property has hit a bottom, with some early signs of recovery kicking in.


While Australian property stocks have certainly bounced off the bottom, they do not seem to be anticipating a powerful resurgence in property prices, but suggest a cautious recovery in prospect. That recovery is happening in residential with early evidence of recovery also in commercial property.



Stockland Group, GPT, Goodman Group, Westfield, Australand, Lend Lease, Mirvac are included amongst some of the larger names in Australia with investments in most property sectors.

Thailand – Market Telling us that Property is Firmly to the Upside

Property and stocks dived amidst the global financial crisis, and Thailand’s market worries were exacerbated by the political strife of earlier this year. Stocks are staging a powerful rebound, and property values clearly have troughed (about 7 months behind stocks), and are now showing some signs of sustainable upturn.


Thai stocks are suggesting that a property recovery is in prospect, and property market indicators are supporting this thesis.

Australia - Property Stocks Show Modest Recovery, but Residential Shows Solid Recovery 1981-2009 (Residential Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.
Australia - Modest Stock Recovery Points to at Least a Bottoming of Commercial Property 1981-2009 (Office Price Index (LHS) vs Property Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.
Thailand - Stocks Reflecting Strong Recovery in Residential Property 1982 - 2010 (Residential Price (LHS) vs Country Stock (RHS)). Months Between Stock & Property Peak/Trough. % Change in Stocks/Property over course of up/down cycle.

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