How to Profit From the Global Real Estate Boom
My fears about a sharp pullback in the markets during September were proven unfounded as your Alpha Investor Letter portfolio had one of its strongest months in recent memory.
Over the course of the past month, the S&P 500 rose 4.10%. The MCSI Emerging Markets Index boasted an even stronger performance, ending the month 7.95% higher.
The big news in your Alpha Investor Letter portfolio was that medical device giant Medtronic (MDT) made a bid to acquire China Kanghui Holdings (KH) for nearly $816 million in cash or $30.75 cents per share. The stock rocketed 24.32% on the news.
In the Oct. 3 hotline, I recommended that you sell your position in China Kanghui Holdings (KH) to lock in your hefty gains. As you know, many Chinese small cap companies have turned up major accounting issues in the past. You don’t want your profits to evaporate in a similar scandal. So you should “take the money and run.”
Other top performers in your Alpha Investor Letter portfolio this month included housing builder Lennar Corp (LEN), which soared 15.33%; Visa Inc. (V), which rocketed 9.91%; and iShares MSCI Mexico Investable Market Index (EWW), which jumped 9.32%.
Many of your positions — including iShares JPMorgan USD Emerg Markets Bond (EMB), Berkshire Hathaway (BRK-B), Visa Inc. (V), iShares Nasdaq Biotechnology (IBB), Lennar Corp (LEN) and iShares MSCI Mexico Investable Market Index (EWW) — ended the month at either all-time or 52-week highs. Other positions like PowerShares Global Listed Private Equity Portfolio ETF (PSP) and iShares Singapore Index ETF (EWS) hit 52-week highs earlier in the month.
As a result of these big gains, I’ve tightened the stops on many of your Alpha Investor Letter positions. Remember, stops are a critical element of the Alpha Investor Letter recommendations. Protecting your gains is at least as important as making the right stock pick. And if you do get stopped out of a position, I’ll likely keep it on the watch list, and you can always re-enter it at a later date.
Finally, I enjoyed “meeting” many of you on my Sept. 27 conference call on “The Best Places to Invest in the World Right Now.” If you couldn’t make the call in person, you can still listen to a recording on my website, NicholasVardy.com.
International Real Estate: Looking Beyond Miami and Las Vegas
In many ways, it was the bursting of the U.S. real estate market that drove the global economy into the Great Recession. And having been burned badly by what turned out to be overpriced real estate, many investors have been avoiding U.S. real estate investments like the plague. But, as is often the case in the investment world, going against the grain can pay off surprisingly well. While pundits parsed the latest data to discern whether the U.S. real estate market had bottomed, savvy investors are making a big picture bet that, yes, the U.S. housing market will eventually recover.
And today, U.S. real estate, specifically your holding in U.S. homebuilder Lennar Corp (LEN), is up 26% just since July 23, and is one of the top-performing positions in your Alpha Investor Letter portfolio.
This month’s Alpha Investor Letter recommendation, the Vanguard Global ex-U.S. Real Estate Index Fund (VNQI), takes your bet on real estate to a global level.
Until recently, global real estate was an exotic asset class, off the radar screen of U.S. retail investors. Information about foreign real estate plays was scarce. And few, if any, global real estate stocks are listed on U.S. exchanges. That changed with the advent of global real estate exchange-traded funds (ETFs) such as VNQI.
Unlike your bet on Lennar Corp (LEN), the Vanguard Global ex-U.S. Real Estate Index Fund (VNQI) is not a bet on a single stock in a single country. Instead, the fund seeks to replicate the S&P Global ex-U.S. Property Index, a benchmark that includes real estate investment trusts (REITs) and real estate operating companies (REOCs) in emerging and developed markets outside of the United States.
So, when you invest in VNQI, you are investing in 440 individual securities from 35 different markets, including Japan, Hong Kong and the United Kingdom.
The Big Picture Case For Investing in Foreign Real Estate
Most headlines that you see in the United States focus on the state of the property market in New York, San Francisco, Miami and Las Vegas. Yet, if you take a global perspective, you get a very different view. In 2011, the Knight Frank/Citi global real estate survey asked investors which cities offered the best investment prospects between now and 2020. I think you would be surprised at the results. Global investors believe New York and London will remain the top two markets to invest in global real estate. But the smart money expects other U.S. cities, such as Washington, D.C., and San Francisco, to tumble in the rankings. In fact, they expect only New York to remain in the top ten globally. Washington, D.C., Los Angeles and San Francisco are expected to fall to between #15 and #20.
VNQI: Where Does Your Money Go?
Coincidentally, VNQI’s regional allocation pretty much tracks the composition of Knight Frank/Citi study’s top ten cities list. The Knight Frank/Citi study found that six out of the top ten cities for real estate are based in Asia. That just about matches VNQI’s 56% weighting in the region. VNQI’s 20.7% weighting in Europe correlates almost exactly with London and Paris, which both are in the top ten.
VNQI’s Top Ten Holdings
Although VNQI is well-diversified among 440 holdings, its top ten holdings account for about 25% of its assets. Here is a quick overview of the VNQI’s top five holdings that together account for 16.2% of the fund’s assets.
Mitsubishi Estate Co. Ltd. (Japan)
MEC is Japan’s second-largest real-estate developer (after Mitsui Fudosan, the #6 holding in VNQI) and is involved in property management and architecture research and design.
Remember the public outcry in 1989 when the Japanese were taking over the Rockefeller Center in New York? Well, it was MEC that famously bought out the Rockefeller Group in New York, the real estate company that then fully owned Rockefeller Center. Although the older section of the Center has been sold, the Rockefeller Group, owned by MEC, still owns the western corridor of the complex. MEC also owns Japan’s tallest building, the Yokohama Landmark Tower, as well as the Sanno Park Tower and Marunouchi Building in Tokyo.
Westfield Group (Australia)
Westfield is the world’s largest retail property group by market capitalization. Listed on the Australian Securities Exchange, Westfield owns and operates one of the world’s largest shopping centre portfolios with investment interests in 124 shopping centers across Australia, the United States, the United Kingdom, New Zealand and Brazil. Westfield’s assets encompass around 25,000 retail outlets and its total assets under management are in excess of $60 billion.
Westfield’s most significant asset is its 50% partnership in the £1.6 billion ($2.57 billion) Westfield London development in Shepherd’s Bush, West London, which also happens to be my local mall. Westfield also owns the Westfield Stratford City and controls the Stratford City redevelopment project next to 2012 Olympic Park in Stratford in East London.
Sun Hung Kai Properties Ltd. (Hong Kong)
Sun Hung Kai Properties Ltd. is one of the largest property companies in Hong Kong. It derives the majority of its revenues and operating profits from its core business development of property for sale and investment. Sun Hung Kai specializes in premium-quality residential and commercial projects for sale and investment and employs more than 35,000 people. The company enjoys a 20% market share in primary residential sales in Hong Kong — a figure that has been largely stable over the last few years. Sun Hung Kai has always retained the highest credit ratings among Hong Kong developers. Moody’s gives the group an A1 rating and Standard & Poor’s extends the property company an A+ rating.
Cheung Kong Holdings Ltd (Hong Kong)
Cheung Kong (Holdings) Limited is one of the largest developers of residential, office, retail, industrial and hotel properties in Hong Kong. High-profile billionaire Li Ka Shing founded Cheung Kong Industries in 1950s as a plastics manufacturer. Under his leadership, the company grew rapidly and eventually evolved into a property investment company.
Cheung Kong Holdings has built many of Hong Kong’s most notable landmark buildings and complexes. Along with the Sun Hung Kai Properties (above), it is the dominant player in the development of new private homes. About one in 12 of the private residences in Hong Kong have been developed by the company.
Unibail-Rodamco SE (France/European Union)
Headquartered in Paris, Unibail-Rodamco is the largest commercial real estate company in Europe. Created in June 2007 through the merger of Unibail and Rodamco Europe, Unibail-Rodamco manages three types of assets: shopping centers, convention centers and office properties. Unibail-Rodamco owns 76 shopping centers in 12 European countries. Fifty-one of those get more than six million visits per year. In May 2008, Unibail-Rodamco purchased much of Shopping City Süd, Austria’s largest retail complex. Through its ownership interest in Viparis, Unibail-Rodamco owns a total of 300 000 sqm of convention center space, across 10 sites in Paris.
Harvard’s Top-Performing Investment of 2012…?
Although foreign real estate is not an asset class you probably invest in, some of the smartest money in the world does — including the Harvard endowment. At my investment firm, Global Guru Capital, I run the “Ivy Plus” Investment Program — an investment strategy that replicates the asset-allocation strategy of the Harvard endowment. The program invests in a wide range of asset classes that you normally would never think of including, such as hedge funds, timber and private equity. And yes, it even has a 2% allocation to foreign real estate.
Among 17 asset classes in which it invests, which one has been the top performer of 2012? You guessed it… foreign real estate, which is up 23.31%, as of this writing. By the way, the second-best performing asset class in the “Ivy Plus Investment Program” is private equity, which you already have an investment in through PowerShares Global Listed Private Equity (PSP).
So, buy Vanguard Global ex-U.S. Real Estate Index Fund (VNQI) at market today and place your stop at $47.00. I’ve given this a low-risk rating of 2. VNQI expense ratio is only 0.35%, which makes it the cheapest fund in its sector. VNQI also boasts an attractive yield of 4.04%.
MSCI Malaysia Index (EWM)
MSCI Malaysia Index (EWM) rose another 3.38% over the past month. In the second quarter, the Malaysian economy grew 5.2% and is expected to grow 4.7% in 2012. With political stability, economic resilience and well-balanced economic growth, Malaysia truly has earned its nickname as the “Fifth Asian tiger.” Rising back above its 50-day moving average, EWM now is a BUY. Raise your stop to $14.20.
iShares JPMorgan USD Emerging Markets Bond (EMB)
iShares JPMorgan USD Emerg Markets Bond (EMB) added 1.74%. EMB continued its slow, steady rise again last month by hitting another 52-week high. Positions like EMB are a healthy part of any portfolio, as their steadiness balances your more volatile holdings. Paying a monthly dividend for an annual yield of 4.38%, EMB remains a BUY. Raise your stop to $118.90.
Berkshire Hathaway (BRK-B)
Berkshire Hathaway (BRK-B) shot up an impressive 6.14%, hitting highs not seen since the start of the financial crisis in 2008. BRK-B’s source of earnings is well diversified and stems from some of the most robust sectors in any market conditions: $3.7 billion from the insurance sector, $3 billion in railroads, $3 billion in manufacturing/service/retail, and $1.2 billion in utilities and energy holdings. BRK-B is a BUY. Raise your stop to $82.50.
Visa Inc. (V)
Visa Inc. (V) rocketed 9.91% last month. V plans to buy back $1.6 billion worth of stock in 2013 and 2014, thereby increasing its earnings per share. JP Morgan writes V will increase dividend payouts in 2015. V is a BUY. Raise your stop to $124.50.
The TJX Companies (TJX)
The TJX Companies (TJX) was flat for the month, dropping 0.5%. TJX has seen its earnings jump by double-digit percentages for the past three years running. The company announced a quarterly dividend of $0.115/share, payable on Nov. 29 to shareholders of record as of Nov. 8. Trading above its 50-day moving average, TJX remains a HOLD. Raise your stop to $40.50.
iShares Nasdaq Biotechnology (IBB)
iShares Nasdaq Biotechnology (IBB) added 6.57%, hitting yet another new all-time high. One of the hottest sectors of 2012, alongside U.S. housing, the biotech sector continues to soar. IBB remains a BUY. Raise your stop to $130.00.
WisdomTree Japan SmallCap Dividend ETF (DFJ)
WisdomTree Japan SmallCap Dividend ETF (DFJ) rose 3.65%. The Bank of Japan extended its quantitative-easing (QE) program by six months and by $1.1 trillion. This should ultimately support your bet on “the cheapest asset class in the world.” DFJ remains a BUY.
Market Vectors Indonesia Index ETF (IDX)
Market Vectors Indonesia Index ETF (IDX) rose 6.64% last month. Indonesian President Susilo Bambang Yudhoyono recently said he expects Indonesia’s gross domestic product (GDP) to expand a robust 6.5% in 2013. IDX is a BUY. Raise your stop to $26.50.
PowerShares Global Listed Private Equity Portfolio ETF (PSP)
PowerShares Global Listed Private Equity Portfolio ETF (PSP) rose 5.81%, even as it pulled back from a new 52-week high. PSP holds 70% of its positions in the financial services sector and 30% in industrials, spread across micro-cap, small-cap, and medium-cap companies. Buying into this exchange-traded fund is the easy way to invest in the sector where Mitt Romney made his money. PSP is a BUY. Raise your stop to $9.05.
iShares Singapore Index ETF (EWS)
iShares Singapore Index ETF (EWS) rose 4.71% over the past month, after hitting a new 52-week high. Mobile operator StarHub, one of Singapore’s largest telecommunication companies, is working with Microsoft to create a “super Wi-Fi” network. This technology will utilize a slice of television bandwidth to transmit network wireless signals faster and farther, keeping Singapore at the forefront of developing mobile communication technology. EWS is a BUY. Raise your stop to $12.65.
Statoil ASA (STO)
Statoil ASA (STO) rose 1.23%. Statoil will invest nearly $7 billion into the development of its Arctic Snoehvit natural gas field. The company’s management believes this investment will allow them to maintain production in the region until 2040. Statoil is scheduled to report earnings on Oct. 26. STO is a BUY. Raise your stop to $23.45.
Lennar Corp. (LEN)
Lennar Corp (LEN) soared 15.33%. Lennar’s Q3 profits surged from $20.7 million ($0.11/share) to $87.1 million ($0.40/share), year-over-year. Revenue was up 34% to $1.1 billion. This beat the street’s estimate of $0.28/share on revenue of $1.05 billion. Lennar also reported a 44% increase in new home orders. With Citigroup upgrading LEN, based upon a positive outlook for LEN’s growth and margins, LEN is a BUY. Raise your stop to $28.50.
iShares MSCI South Korea Index Fund ETF (EWY)
iShares MSCI South Korea Index Fund ETF (EWY) rocketed 8.68%. South Korean regulators recently left interest rates unchanged, signaling strength in South Korea’s economy. However, regulators did signal the possibility of gradual cuts, if needed, and revealed a $1.3-billion stimulus fund to buoy small businesses. EWY is a BUY. Raise your stop to $54.25.
iShares MSCI Mexico Investable Market Index (EWW)
iShares MSCI Mexico Investable Market Index (EWW) jumped 9.32%. Driven mainly by foreign direct investment and exports, Mexico is gaining recognition among global investors. Throw in its low manufacturing costs, low inflation and large, young labor force, and it’s no wonder that Mexico is hitting a new 52-week high. EWW is a BUY. Raise your stop to $60.00.
Sociedad Quimica y Minera de Chile S.A. (SQM)
Sociedad Quimica y Minera de Chile S.A. (Chemical & Mining Company of Chile) (SQM) was a rare source of weakness in your portfolio, dipping 2.24%. In late September, SQM announced that it would pay $40.6 million for a 20-year license to mine government-owned land in Chile. A few days later, the Chilean government rescinded the 20-year lithium pact, based on technicalities in the qualification process. Although it is due for a bounce once the impact of this news fades, SQM is a HOLD.
“China Strategy” Legacy Portfolio
Apple (AAPL) gave back 2.86% last month. Although the outlook for iPhone 5 demand looks rosy, AAPL continued to dip, based upon a rash of news highlighting some minor shortcomings in the highly anticipated device — primarily involving the mapping technology. AAPL is scheduled to report earnings on Oct. 25. Now trading under its 50-day moving average, AAPL is now a HOLD. Raise your stop to $595.00.
Global Markets on a Sugar High
On Sept. 6, the European Central Bank (ECB) committed itself to buying the bonds of cash-strapped, euro-zone members. On Sept. 13, the Fed announced quantitative-easing part III (QE3) and its commitment to keep interest rates at near-zero “at least through mid-2015.” The Fed also pledged to start buying $40 billion of additional mortgage assets a month.
Even before he became Fed chief, Ben Bernanke earned his nickname “Helicopter Ben” by declaring that in the event of a new Great Depression, as a last resort the Fed could always drop dollar bills out of helicopters to spur the economy.
History will likely show that Sept. 13 was when Ben Bernanke’s helicopter finally took off…
The Law of Unintended Consequences
Needless to say, actions from the ECB and the Fed have caused some unease. After all, if printing money were the key to global economic recovery, why did the world’s leading central banks wait this long?
The fire-and-brimstone crowd is already predicting imminent economic collapse. Secular profligacy demands divine punishment. Living within your means is good. Printing money is evil. Rather than a battle of “good” versus “evil” — printing money doesn’t violate any of the Ten Commandments — the impact of the Fed’s real-life experiment on the global economy will be determined by the less obvious “law of unintended consequences.”
Here’s what that law states: Anytime experts meddle with a complex system — whether it’s Mother Nature or the global economy — it will suffer (mostly negative) effects that you can’t predict.
Yet, it’s these unexpected effects that will turn out to be most important — and dangerous. The truth is, we are in uncharted waters, and we simply don’t know what we’re in for. With that, here are a handful of more predictable effects as a result of the world’s central banks releasing the monetary taps…
1) Little or No Impact on Wealth or Economic Growth
The Fed wants to make you feel richer. If you look at your Alpha Investor Letter portfolio this month, you probably do.
What you won’t see there is that the same forces that made your portfolio soar will also cause commodities — think food and energy prices — to rise. That rise, of course, makes you feel poorer. Here the Fed suffers a self-imposed blind spot: food and energy prices aren’t part of its measure of “core-inflation.”
Nor will your newfound wealth have much, if any, measurable impact on economic growth. After quantitative-easing part II (QE2), growth in the real economy decelerated in 2011. Ditto after the Fed’s “operation twist” last year that involved buying long-term Treasury bonds through the sale of short-term Treasury notes to flatten the yield curve.
2) Punishes Savers and Devastates Retirements
The Fed’s low interest rates punish you if you’re a diligent saver. The Fed gets this, but says you should suck it up. After all, we all benefit from an economy spurred by lower rates.
Now, that’s fine if you’re a public-sector employee with a cushy pension.
But with Treasury rates at 1.5% a year, you would have to set aside $6.7 million to earn a roughly $100,000 pension. A mere $3.35 million is enough if you can live on $50,000 a year. And that assumes you’d pay no tax on your earnings.
3) Government Profligacy Promoted
The Fed’s policies give the U.S. government a free pass when it comes to government spending. Or, at least “free money.” There’s little doubt Congress spends more as a result of the Fed’s zero interest rate policy. If interest rates were 5%, this year’s fiscal deficit would be nearer to $2 trillion.
4) Rolling the Dice with Inflation
The Fed insists that inflation is in check. As I’ve noted, the Fed’s “core inflation” calculations conveniently ignore the run-up in food and energy prices. Indeed, the Fed does not eat food or buy gas. Sadly, you and I do.
An even bigger worry is the future. The Fed is in uncharted territory with respect to unwinding its balance sheet. Assurances from philosopher kings with lousy track records in handling crises are hardly convincing.
5) Playing Politics
No matter which lever you pull in the ballot booth this November, understand that the Fed’s artificial sugar high makes President Obama’s election more likely. A rising stock market in the United States correlates highly with rising approval ratings for the president. And Mitt Romney has said that if he’s elected, Fed Chairman Ben Bernanke is out of his job. That makes the timing of the Fed’s current move all the more cynical.
The United States’ “Safe-Haven” Curse
The United States suffers from a “safe-haven” curse. When the S&P yanked the U.S. government’s AAA rating last year, interest rates actually fell. And those who continued to bet against U.S. Treasuries, bond king Bill Gross of PIMCO included, got their heads handed to them.
Despite the chest thumping that the United States does about Europe’s profligacy, it is small countries like Ireland and Estonia that have already bitten the bullet the United States keeps dodging. When I spoke with the finance minister of Estonia at the London School of Economics last month, he pointed out that Estonia now has the fastest-growing economy in Europe. When I saw the Spanish prime minister this Friday, the mere mention of cutting benefits to the populace caused protest banners in the audience to unfurl. Europe has Germany to keep its relentless government-spending spree in check. The U.S. government has no such strict parent to say no to its $3-billion dollar a day deficit spending addiction. As the big dog in the global economic neighborhood that prints its own money, the U.S. government seems to get away with everything. This keeps it from being forced to implement painful reforms.
Your Next Steps as an Investor?
For a while, the sugar high will propel markets higher. And you will feel wealthier as the value of your portfolio rises. And that may go on for a lot longer — perhaps even years. Unsustainable trends go on… until one day, they suddenly don’t.
The elephant in the room is that the moves by the ECB and the Fed are — to use the metaphor of the moment — just kicking the can down the road. At one point markets will turn. And much like after the 2008 market drop, you’ll have to shift your focus to preserving your hard-earned wealth, rather than to increasing it. It can be done. After all, the recommendations of this newsletter actually made money in September of 2007, the month Lehman Brothers collapsed. But hold on for a rocky ride.
Actions to Take This Month
- Buy Global Ex-US Real Estate ETF Vanguard (VNQI) at market today, and place your stop at $47.00. I’ve given this pick a risk rating of 2.
- Raise your stops in many of your positions as noted in the “Portfolio Update” section.
- Visit my website, www.NicholasVardy.com, and sign up for The Global Guru, my free, weekly e-letter.
- Follow me on Twitter @NickVardy and on my blog, NickVardy.com.