WHAT’S THE STORY? Event: The recent bout of disappointing macro data from the US and the likely response to this by the Federal Reserve should reinforce recent weakness in the trade-weighted US Dollar Index. Impact: Interest rates in the US and Hong Kong will be on hold for longer than the market had previously expected. A low interest-rate environment coupled with a weak US dollar will extend the bull market in residential property prices, which is undoubtedly positive for Hong Kong real-estate developer stocks. Over the past five years, property stocks have consistently outperformed the market during periods of extended US-dollar weakness (figure 12). Action: HK property-developer stocks have underperformed the market and even property-investor and REIT stocks within the sector year to date. This presents investors with an ideal opportunity to position for renewed strength in this laggard sector ahead of further US-dollar weakness and a loose-monetary environment. Cheung Kong (1 HK, NR) is the most attractive way to play higher property prices given its cheap valuation, underperformance, and the firm holding one of the largest landbanks in Hong Kong.


THE QUICK VIEW
Property prices in Hong Kong are ―slightly unrealistic‖, warned the Hang Seng Bank (The Standard, Aug 5). No doubt, the strength of the rebound in physical property prices in HK has pundits calling for real-estate prices to peak now that luxury-property prices have surpassed 1997 levels.
And certainly, bubble-calling hasn’t helped the underperformance of HK real-estate developers (capped since the beginning of the year), while a strong dollar and fears of monetary tightening earlier this year has been an overhang.
However, with expectations of interest rate hikes now pushed further out, and the US dollar likely to extend its recent weakness, such a loose monetary environment should continue to support physical property prices.
We believe that that underperformance for HK real estate developers since the US dollar bottomed in November is ending, thanks to a potent combination of: 1) a weak US dollar; 2) ultra-low interest rates; and 3) rising local inflation amid negative real-interest rates—similar conditions to those during the 1996 property boom.