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The Great Disconnect Creates a Great Opportunity

By Dr. Steve Sjuggerud
Thursday, December 13, 2012

For decades, the shares of property companies in Hong Kong have tracked property prices.
 
It's a simple idea... When real estate prices go up, shares of property companies go up.
 
In Hong Kong, the gains can be just silly. And it's an easy trade for Americans to make. The thing is, we haven't seen this classic relationship since the start of 2011.  
 
Over the past two years, we've seen what my friend Peter Churchouse calls "a significant disconnect" between Hong Kong property stocks and property prices. Since the start of 2011, shares of property companies have fallen, while property prices in Hong Kong have gone up. This "disconnect" has created a great opportunity... 
 
Peter is one of the true pioneers of emerging-markets investing. For the last 30-plus years, he's been based in Hong Kong, pursuing investment opportunities in Asia. And right now, he sees a tremendous opportunity in the "significant disconnect" between property prices and the share prices of property companies... 
 
Peter writes extensively about this idea in the latest issue of his newsletter, the Asia Hard Assets Report (www.AsiaHardAssets.com).
 
I believe the historical relationship will return. In the meantime, shares of property companies in Hong Kong are a good buy today...  
 
As Peter explains, the value is great: "Shares are not overly stretched, with forward [price-to-earnings ratios] averaging around 11 times, and shares trading at around 30%-45% discounts to NAV (net asset value).
 
He also points out these businesses are very safe... 
 
Hong Kong's major property companies collectively have probably the most-lowly geared balance sheets of any major developed market anywhere. Most major property development companies carry net debt equity ratios of less than 25%, with many at around 15% or less.

Financial risk is very low. Hong Kong's developer balance sheets would be the envy of most property markets around the world.
 
So what do you buy to take advantage of it? 
 
Peter says investors should stick with the well-established "developer" names, "the hard core companies that dominate Hong Kong development scene." These stocks are the safest bets in an environment characterized by "significant levels of uncertainty." 
 
Many of the big-name developers are all holdings in the Guggenheim China Real Estate Fund (TAO).
 
I recommended shares of TAO to my True Wealth subscribers in September. Shares are already up nearly 20%. This rally tells me that Peter's "great disconnect" is starting to go away.
 
In addition to Hong Kong, TAO holds shares of Hong-Kong-traded companies that specialize in Chinese real estate.
 
In his letter, Peter says China real estate plays are CHEAP, too: "[China real estate] shares are typically trading at deep discounts to underlying net asset values, broadly in a range of 30% to 70% discounts.
 
These stocks are also HATED: "China has been very much out of favor with international investors in the past year or so, and China stock indices have been major underperformers.
 
And now – judging by the 20% move in TAO since September – we're finally starting to see an UPTREND.
 
We have our True Wealth "Holy Grail" for investing – TAO is 1) cheap, 2) hated, and now 3) in an uptrend.
 
This is your lowest-risk, highest-reward time to buy.
 
I expect that this property bubble will go higher than our property bubble went in the States.
 
Yes, True Wealth subscribers are already up about 20% in TAO in just a few months. But I believe this is just the beginning...
 
Good investing, 
 
Steve 
 
P.S. Peter Churchouse is my go-to source for what's happening in Hong Kong and China. For more on his Asia Hard Assets Report, visit www.AsiaHardAssets.com.




Further Reading:

Be sure to read Steve's recent essay, where he revealed another great way to profit off Peter's Hong Kong real estate thesis. This investment "soared 200%-plus three of the last four times the Federal Reserve cut rates this low," Steve writes. "It could certainly happen again." Get the full story here: Turn 0% Interest Rates into Triple-Digit Gains.
 
In October, Peter shared an investment idea with DailyWealth readers. "With a pile of positive indicators that should remain in place for years, combined with reasonable valuations," he writes, this opportunity has triple-digit-upside today. Read more here.

Market Notes


FRESH MULTIYEAR HIGHS FROM TWO BIOTECH GIANTS

Good news for small drug companies: the large ones are doing extremely well.
 
Longtime readers know we constantly monitor biotech stocks. It's one of the greatest "boom and bust" sectors of the market. As Steve has written several times, if you catch a good biotech boom, you can make extraordinary gains.
 
The biotech industry is led by several big "bellwethers," Amgen and Gilead Sciences. The profits and share prices of these companies can act as the "locomotive" on the rest of the biotech train. If the share prices of these two companies soar, so will the smaller players. Plus, if their businesses are producing lots of cash, they have more money to spend on acquisitions... which also drives small company share prices higher.
 
So far, 2012 has been a banner year for Amgen and Gilead. As you can see in today's chart, shares of both companies took off this year (thanks in part to record sales). In just the past year, Amgen has climbed 58%. Gilead has climbed 96%. Both sit at new yearly highs. There's a heck of a tailwind blowing at biotech's back.
 
– Larsen Kusick 
 

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