With China Out of Fashion, This Fund's Trading at a Discount

I have done several business trips to Shanghai and Beijing in the last 2 months and will do more frequent travel this year. It has been a couple of years since I've visited Shanghai, and well, basically nothing changed except the traffic is more congested and there are more commercial and residential buildings erected. Apart from that,  all 5-star hotels are very crowded. 2 years ago I would never have imagined there would be such a long queue waiting for check-in at the Beijing Grand Hyatt. Same situation in Shanghai - the Grand Hyatt has occupied the last section of land at the Bund, (very inconveniently located indeed) and they've constructed a Park Hyatt.

Regarding the market - it's like the sky has fallen and my portfolio value has also diminished a lot. I am asking myself what shall I do this year in terms of asset allocation and I would like to share my thoughts with you.

First of all, I've bought a new apartment in Hong Kong Real estate has never been in my investment portfolio but now I have changed my view. I see a very strong demand for HK properties both from real users and speculators.

All friends surrounding me are in their late 30s, most of them have new born babies over the last 12 months or so, they have real requirements to move to a bigger flat for their babies and maid (in HK, most people have maids to take care of their kids, as most couples are working parents). There is very strong demand to upgrade from a 2 bedroom to 3 bedroom apartment. Why didn't this happen in the past 10 years? After the property market collapsed in 1997 and we had SARS in 2003, the inflection point for HK's economy came really in 2006 when the global financial environment was much improved. On top of that, there were all the Chinese IPOs from which a lot of people here were able to make some money.

Speculators side, China will continue to cool down the PRC property market, while I don't see there any significant softening in the trade surplus. The end result is still a continuous increase in liquidity. Yes, the government will continue to raise the RRR for banks and reduce the amount of money flow to the market, but don't forget there are a lot of people who are already very rich. If Shanghai or Beijing or Guangzhou cannot give them a good and quick return anymore, the most likely place they will go is Hong Kong, as that is the next most familiar place they know. That's why I bought my new property.

Regarding the stock market, I just checked the NAV of CAF again. It's at about 33% last night - the graph below is not updated but you can see the discount trend for CAF:

I think it's a good buy at this discount.

The US economy, like it or not,  admit or not,  will not perform the way it did in 2006 or 2007. In fact, within my company we have a debate how how the US economic slow down will affect our business in Asia. My view is that money will flow to whatever places which can make money. If the US economy slowed down, money will flow to other regions and Asia will for sure be among the top of the list.

If you look at emerging market funds (for the sake of illustration you can check out the discount of all other closed end fund at www.ms.com/im),  interestingly CAF has the largest discount. e.g. India Fund IIF is 12%, Thai Fund is 10%. I cannot believe China deserves such a high risk premium comparing to the other Asia countries, so is there a market mis-pricing opportunity with CAF? I think so !

Good luck and see you next time.