Notes on France's Credit Stress, New Brazil ETF and China's Housing 'Bubble'

by: Global Investing Editor

On Wednesday I attended two conferences, one by Old Mutual on outlook for markets, and the other by the Qwafafew quantitative analyst drinking club about data mining.

At the first conference Jerome Heppelmann CFA, the star manager of the Old Mutual large cap core fund, warned of mounting French credit stress and predicted "a long and difficult summer". His concentrated portfolio is focused on large caps because of "visibility".

At the Quants' club, the word was GIGO, garbage in garbage out. Bad and often restated data produces misleading back-testing results according to Charter Oak Investment Systems' Marcus Bogue, PhD. But it also can pay off if you can figure out how to clean up the data to predict the future biases and behavior of major institutional players, according to Dirk Resnick, who runs StarMine for Thomson Reuters. One fascinating insight he provided is that because of fund and index rebalancing rules, managers in subsequent quarters will sell their largest positions after they have risen (thanks to good performance). Resnick also works to identify valuation shorters of stocks doing this for fundamental reasons, to remove the impact of 130/30 long short hedge funds and that of arbitragers (for example over convertible bonds or stock.)

A new mid cap Brazil Exchange Traded Fund is coming. The Brazil Mid-Cap Exchange Traded Fund will start NYSE trading Tuesday. Global X Management Co. is the asset manager. The ETF will invest in Brazilian firms with $2 bn to $10 bn in market cap like Natura Cosmeticos SA (OTC:NUACF), its biggest cosmetics maker, and Cyrela Brazil Realty, its largest homebuilder. Trading as BRAZ, it will track the Solactive Brazil Mid Cap Index. I haven't decided yet if it is a buy.

The “bubble” in China’s property market is going to burst very quickly, with prices likely to fall by 20% in the next 12 to 18 months, Sun Mingchun, a Hong Kong-based economist at Nomura told Bloomberg. China’s banking regulator warned of growing mortgage credit risks and warned of increasing non-performing loans.

Real estate spending rose 38% in the 2010 to end-May, according to the Chinese National Statistics Bureau. Prices jumped 12.4% in May alone. To try to cool things down China increased down payment requirements and mortgage interest, and restricted lending for buyers of second and more homes.

So here are the round-eye responses, also from Bloomberg.

The property boom in China isn’t a bubble because it’s supported by “solid” demand for residential housing, according to Stephen Roach, chairman of Morgan Stanley Asia. While portions of the real-estate market such as high-end apartments are overheating, demand for residential homes will remain robust as rural Chinese migrate to bigger cities, Roach said in a Hong Kong radio interview ith Tom Keene (Bloomberg). “Each year since 2000, between 15 and 20 million people migrate to Beijing, Shanghai, and second- and third-tier cities in mainland China. That’s two and a half New York Cities created annually,” Roach said. “This underpins a huge demand for residential property. This property has not overheated and the demand for this property is very, very solid.”

Another round-eye view:

Jeremy Grantham, chief strategist of Grantham Mayo Van Otterloo said China may manage to avoid a housing collapse like ours, according to what he told Chinese media yesterday. He described Beijing's approach to tacking rapidly rising real-estate prices as "experimental," crediting the Chinese government with being "adventurous in trying new things.” “They're really quite aware of potential dangers," he told China Daily as quoted by Bloomberg. China's situation is also less serious than the one seen before the U.S. housing crash, since fewer Chinese own luxury homes and most had to make larger down payments than their U.S. counterparts.

Meanwhile the highest priced real estate on earth, in Hong Kong's mid-peak Henderson Tower, is not selling and the top floor penthouse buyer has cancelled the purchase.