ETF Update: Chinese Real Estate, Water and Singapore

Real Estate in China Presenting Real Opportunity

As the U.S. real estate market is in shambles, Chinese real estate may be building up, upgrading ETFs as they go.

The Chinese residential market has managed to maintain its strength, and the pace of construction is hard to keep up with. Tony Sagami for Money and Markets illustrates this with the fact that around 70% of all the world’s construction cranes are on Chinese soil.

According to the National Development and Reform Commission, China’s top economic planning agency, house prices in 70 large- and medium-sized Chinese cities rose 9.2% in the second quarter from a year before. Around 80% of all Chinese homes are bought with 100% cash, and the savings rate in the country is 25%. This is why China’s housing market has been isolated from the U.S. breakdown.

There are a couple Chinese real estate stocks and ETFs listed on U.S. exchanges that could eventually reflect the buildup in Chinese real estate:

• Claymore AlphaShares China Real Estate (TAO), down 29.6% year-to-date
• iShares FTSE/EPRA NAREIT Asia Index Fund (IFAS), down 21.5% year-to-date

Water, Singapore Are ETFs To Watch

Although trading volume in some exchange traded funds (ETFs) has spiked rapidly recently, one fund manager is skeptical of some of the movements.

Anthony Welch, the Sarasota Capital Strategies manager, is not buying the recent rally within financials. Although the Financial Select Sector SPDR (XLF) has the second-highest trading volume, the ETF is still down 25% year-to-date, reports Murray Coleman for Index Universe.

Some other funds on the “watch list” include:

• PowerShares Water Resource (PHO), which is up 1.4% year-to-date, compared with the S&P 500’s -13.7% for the year so far. The fundamentals that are driving PHO’s performance include demand for water treatment systems and technology related to water consumption. All that makes PHO strong for both short and long term prospects.

• iShares MSCI Singapore Fund (EWS): Down 9.9% year-to-date. Singapore is in the middle of an overall expansion going on in Asia right now. The banking system in Singapore is the most stable of the Asian countries, and the employment force is highly educated.

Disclosure: Tom Lydon’s clients own shares of PHO.

Comments

[zhivago:]

Why is their no mention of Claymore's water ETF in this article. Is it comparable to PHO ?

2008 Aug 02 09:35 AM

[Emerald:]

PHO is filled with companies loosely related to "water". It isn't really a water play. As for Singapore, yes it is stable but there is no decoupling of asia markets from Euroland and the U.S. AS we go doen or weaken, so will they.

2008 Aug 02 04:27 PM

[johnthebear:]

"Aug. 1 (Bloomberg):

China Manufacturing Shrinks for First Time on Record.

By Li Yanping and Nipa Piboontanasawat

Aug. 1 (Bloomberg) -- Manufacturing in China contracted for the first time since a survey began in 2005 as export demand faltered and factories closed to clear the air before the Olympic Games.

The Purchasing Managers' Index fell to a seasonally adjusted 48.4 in July from 52 in June, the China Federation of Logistics and Purchasing said today in an e-mailed statement.

The expansion of the world's fourth-biggest economy slowed for the fourth straight quarter in the three months through June on weaker U.S. demand. China raised tax rebates for shipments of textiles and garments today and the commerce ministry is pressing for slower yuan gains to protect exporters after the currency's 6.8 percent advance against the dollar this year.

``Companies are less willing to invest as export growth slumps, credit gets tighter and the economic outlook worsens,'' said Sun Mingchun, an economist at Lehman Brothers Holdings Inc. in Hong Kong. ``Factory closures ahead of the Olympic Games may also have played a role.''

The yuan fell 0.1 percent to 6.8409 against the dollar as of 11:13 a.m. in Shanghai.

The government has closed construction sites and shuttered factories in and around Beijing to clear smog before the games start next week. Shougang Corp., a Beijing-based steelmaker, will keep only one of four blast furnaces open during the games.

Not Enough Electricity

China also faces power shortages. The government has asked coal producers to increase deliveries to power stations to help ease a sixth year of electricity shortages and ensure supplies for the games, according to a July 30 report by the state-run Xinhua News Agency.

Six of 11 sub-indexes in the PMI fell to record lows, including output, new orders and export orders.

``The size of the slowdown is unexpected,'' said Xing Ziqiang, a Beijing-based economist at China International Capital Corp., the nation's biggest investment bank. ``The government may use a more active fiscal policy, slow gains by the yuan, and encourage lending to small companies.''

The Communist Party's Politburo said July 25 that maintaining growth and fighting inflation are the two biggest priorities for the rest of the year. Inflation this year is the fastest since 1996. Consumer prices rose 7.1 percent in June.

China is raising tax rebates on exports of textiles and garments to 13 percent from 11 percent today, according to the State Administration of Taxation. The Ministry of Commerce had urged China's cabinet to rein in currency gains and raise some rebates, a ministry official said July 14, speaking on condition of anonymity.

Yuan's Advance

The yuan's advance against the dollar in 2008 has been at more than double the pace of a year earlier.

The economy expanded 10.1 percent in the second quarter as the trade surplus narrowed 12 percent from a year earlier to $58.14 billion.

Today's survey ``may indicate the economy will continue to weaken,'' Zhang Liqun, a senior research fellow at the State Council's Development Research Center, said in the statement. Companies ``are facing increasing difficulties and this could curb economic growth and reduce employment and incomes.''

The PMI is based on a survey that started in January 2005 of more than 700 companies in 20 industries, including energy, metallurgy, textile, automobile and electronics. A reading above 50 reflects an expansion, below 50 a contraction.

The output index fell to 47.4 in July from 54.2 in June, while the index of new orders dropped to 46.2 from 52.6. The index of export orders declined to 46.7 from 50.2."


I think this article copied from Bloomberg is very telling for the next year. So while housing construction has been doing well in the last couple of years, have you factored in the huge drop in the Chinese stock markets and the loss of wealth by average citizens?

A recent forcast of a drop from 10% to 9% in the China growth rate may not be all that is involved in a slowdown of China. I have read of substantial overbuilding of manufacturing capacity in China and massive real estate speculation by developers with huge bank loans that may be foreclosed. The banks in China already have large loan defaults on their books that they have not acknowledged. But afterall, this is China.

The survey out today of purchasing managers supports more than a reduction of manufacturing due to smog conditions relative to the Olympics. This is a national issue.

You have not yet seen the effect in China of the sharp reduction of sales to Europe and USA, which are coming. Recession in both will cause lower exports from the US to Europe which has been supporting recent growth in the US. Sales outside the US have been the majority of the earning growth of US international companies.

It seems to me that the Europe recession which is only now beginning to take hold will greatly slow US export sales and will likewise impact China. As US and Europe slow, all exports from China slow, with growing factory closings and rising unemployment while at the same time inflation grows from 7% to 12% in China. Could get real interesting to watch the China government under these conditions!

So bottom line, China stock markets will continue to fall back to the 2004-05 level and that will probably include the stocks mentioned by the author, which don't look very promising IMO.

China FXI will continue falling. If you think the market will fall off the cliff after the government prop up of the Olympics, why not sell now?

2008 Aug 02 06:09 PM