Alternative Asset Classes–Here’s What You Need To Know Now

• September 24, 2004
• Mark Boucher

Alternative
Asset Classes

 

During times of great
uncertainty in the equity markets where it is very difficult to make money using
trend following techniques, I spend a lot of time analyzing alternative asset
classes and looking for ways to exploit inefficiencies in these asset classes. 
One asset class that I have been studying of late is emerging markets real
estate. 

 

In the late 1980’s I had the
privilege of working with and meeting an extremely successful global real estate
investor who had taken $1m in the late 1950’s and built it into several hundred
million dollars in value.  Essentially he would travel the world in search of a
developing country where he could see value and that things were turning around
economically.  He would then invest $1m in a diversified set of properties, and
when the property doubled, he would sell half of the units and then take his $1m
out and search somewhere else. 

 

One of the keys to his success
was that developing markets tend to have rising levels of per capita income that
feeds its way into real estate.  In fact real estate is much better correlated
to rising income levels than stock prices in Emerging Markets.  This was true in
the US as well during its great development during industrialization. 

 

Recent studies show
productivity in Emerging markets is accelerating and growing at a consistent 4%+
annual pace.  As investors know, productivity growth is a key component of
rising per capita incomes — and rising per capita incomes generally feed into a
rising real estate market.   Strong productivity growth also goes hand in hand
with disinflation, falling interest rates, improved competitiveness, the ability
to withstand stronger currencies in the long-run, and rising trade balances. 
Real estate markets stand out as a primary beneficiary of productivity gains in
Emerging Markets.  In fact charts of housing prices and GDP per capita in most
EM’s are parallel. 

 

Unfortunately rising
productivity does not always translate into higher corporate profits or a rising
tide of equity market prices.  There are generally stages where corporations
(usually early on after capital investment) garner a higher percentage of
productivity gain benefits than do laborers and then cycles (usually later) when
labor in turn garners a higher percentage of productivity gains in the form of
rising wages that can even outpace productivity gains for a while.  These cycles
are determined by supply and demand forces.  For example, there were substantial
and consistent productivity increases throughout the 1990’s yet on the whole
listed company earnings in EM’s did not move much higher.  Consumers ended up
taking the lion’s share of these productivity gains as per capita incomes rose
substantially.  Many Asian companies funneled revenue into  maximizing asset
size not profits.  Yet during the 1990’s EM real estate appreciated
substantially in line with rising per-capita incomes. 

 

While it appears that companies
are swinging back toward higher profits now, real estate gains remain a much
better proxy of the growing wealth of a nation than do shares in Emerging
Markets. 

 

Long-term investors wanting to
participate in the substantial growth likely in Emerging Markets over the coming
decades should seriously consider investing in Emerging Market real estate or
vehicles that exploit this trend.  REITS and development companies traded as
equities are not a real substitute because they correlate so closely with the
overall stock indexes.  We will be discussing ways to exploit this trend further
in the coming months.

The great EM real
estate investor I mentioned earlier has now liquidated over half of his
properties and is heavily in cash for the first time since the 1960’s.  There
are only a few spots where he has invested in the past few years, including such
areas as Eastern Europe, Buenos Aires, and Croatia.  He believes that there
could be a substantial shakeout in Asia during the next recession that could
lead to once-in-a-lifetime opportunities in EM Asia real estate in the next 1-3
years.  We will keep investors posted, but long-term investors may want to
consider moving toward investment in this area. 

This week in our Top RS/EPS New Highs list published on TradingMarkets.com, we
had readings of 80, 112, 80, 102, and 56 with 55 breakouts of 4+ week ranges, no
valid trades and no close calls.  Valid trades appear open in CETV and MLI. 
Breadth is expanding again and more close calls would be a call to add some long
exposure.  Position in valid 4+ week trading range breakouts on stocks meeting
our criteria or in close calls that are in clearly leading industries, in a
diversified fashion.  This week, our bottom RS/EPS New Lows recorded readings of
6, 7, 7, 7, and 9 with 10 breakdowns of 4+ week ranges, no valid trades and no
close calls.  We’re still not getting a lot of trading signals in valid
breakouts, though the environment is improving slightly on the long side — let’s
see if this holds up now that some resistance levels are close at hand.

For those not familiar with our long/short strategies, we suggest you review my
book

The Hedge Fund Edge, my course “The
Science of Trading,”

my video seminar, where I discuss many
new techniques, and my latest educational product, the

interactive training module. Basically,
we have rigorous criteria for potential long stocks that we call “up-fuel,” as
well as rigorous criteria for potential short stocks that we call “down-fuel.”
Each day we review the list of new highs on our “Top RS and EPS New High List”
published on TradingMarkets.com for breakouts of four-week or longer flags, or
of valid cup-and-handles of more than four weeks. Buy trades are taken only on
valid breakouts of stocks that also meet our up-fuel criteria. Shorts are
similarly taken only in stocks meeting our down-fuel criteria that have valid
breakdowns of four-plus-week flags or cup and handles on the downside. In the
U.S. market, continue to only buy or short stocks in leading or lagging
industries according to our group and sub-group new high and low lists. We
continue to buy new long signals and sell short new short signals until our
portfolio is 100% long and 100% short (less aggressive investors stop at 50%
long and 50% short). In early March of 2000, we took half-profits on nearly all
positions and lightened up considerably as a sea of change in the
new-economy/old-economy theme appeared to be upon us. We’ve been effectively
defensive ever since, and did not get to a fully allocated long exposure even
during the 2003 rally.

Mark Boucher