Tom Yeung here with today’s Smart Money.
On May 27, a gated home in Shanghai’s Changning District sold for 270 million yuan ($38 million), creating a sensation in the Chinese press.
“How can it not make people drop their jaws?” one Chinese reporter asked. “It is like a boulder thrown into the market, stirring up waves.”
It’s often easy to overlook this kind of news. Chinese is wildly different from English, making literal translations sound eye-rolling. The rest of the article mentioned the house’s “invincible” location and “irreplaceable humanistic value.” (It makes a lot more sense in idiomatic Chinese.)
An “invincible” location, according to Chinese media.
Yet, this sale is far more important than most Western investors realize. It could mark the start a new commodities supercycle that has the potential to power stocks higher for years to come.
So, in today’s Smart Money, let’s take a look at how that could play out…
And at some of the companies that should benefit from China’s housing comeback…
The $19 Trillion Growth Engine
It’s hard to overstate how important China’s real estate is to global growth. The country is home to 1.4 billion people, and more than 70% of their household wealth is invested in real estate, compared to just 30% for Americans.
Chinese savers use real estate instead of the stock market to store wealth, and it’s become their version of a consumer economy. Chinese parents often buy apartments for their children, who are then expected to buy homes for their kids, and so on.
That caused a commodities supercycle between 2002 and 2015. During these peak years, commodity-focused funds like the iShares MSCI Brazil ETF (EWZ), a fund that invests in public equity markets of Brazil, saw prices surge 1,000%.
At the same time, some more focused players soared far further than that thanks to insatiable demand for imports into China. For example, Global Ship Lease Inc. (GSL), a containership owner,rose 750,000%.
In fact, Microsoft Corp. (MSFT) co-founder Bill Gates once famously noted that China consumed more concrete between 2011 and 2013 than the U.S. used in the entire 20th century. Shares of China’s Anhui Conch Cement rose 21,000% in the decade leading up to that period.
And here’s the thing: Despite almost two decades of construction, China still lacks quality housing. Single-family homes remain rare, and average per-capita living space comes to just 473 square feet, or less than half of the 971 square feet per person the U.S. boasts for new builds.
That means Chinese residential real estate still has plenty of runway for growth… and so do the companies that serve the country’s growing demands. Copper… steel… even consumer goods will benefit as a spillover wealth effect takes hold.
We’re also seeing other signs that a new commodity supercycle could be on the way.
On Sunday, property research group China Index Academy revealed that the average price of new homes across 100 Chinese cities rose 0.3% in May, almost double April’s increase of 0.14%. This represents the first significant uptick since 2023.
Chinese residential real estate developers like Vanke and Longfor Group have additionally seen share prices stabilize. These highly indebted companies saw a crushing pullback in the 2015-2024 period after the Chinese government began clamping down on state-sponsored real estate lending.
Their recovery is a lot like Wells Fargo & Co. (WFC) and Citigroup Inc. (C) clawing their way out of the 2007-’08 financial crisis. Once these developers recover, so will Chinese construction and all the consumption that comes along with it.
How to Invest in China… Safely
Of course, investing in China needs a great deal of care.
Chinese real estate developers operate more like financing vehicles, and accounting tricks are easy to hide. (My first boss insisted I treat statements from Chinese financials like works of fiction.) The average Chinese property developer trades for under 0.5X book value, because no informed investor believes they’re worth the assets on their official books.
Quality among other Chinese firms is also inconsistent. Auditing standards are lax, and many bad players use that as an invitation for outright fraud. If we ever recommend a Chinese stock, it will only be after an incredible amount of research.
That’s why, in Eric’s Fry’s Investment Report service, we’re interested in the secondary winners that stand to gain from a resurgence of Chinese demand. These are Western-based firms held to higher accounting and governance standards that sell enormous amounts of products into China.
They fall into two categories…
- Upstream Suppliers. The most direct impact will be felt by commodity suppliers like copper and gold miner Freeport-McMoRan Inc. (FCX), which sells much of its international production to China.
The country imported a jaw-dropping 65% of global copper exports in 2023 (a year when construction was still muted). A return to more “normal” levels of construction alone will create a mini commodities supercycle.
- Downstream Suppliers. We’ll also likely see improvements in demand for consumer goods and industrial products, benefiting companies that use Canada and the European Union as production bases.
In fact, Eric recently recommended one such downstream supplier that serves China’s elite. Fry’s Investment Report members already have seen their shares of this Canada-based firm surge 60% in the past two months thanks to strong Asian sales. Plus, this company has already reported an 8% increase in Chinese sales in the most recent quarter.
And we foresee even greater gains ahead as China’s economy heats back up. (To learn more about this company – and the other upstream and downstream Chinese suppliers that Eric recommends – click here to learn more about becoming a member of Fry’s Investment Report today.)
Over the next several years, we’ll likely see the Chinese economy return to stable growth. And those who dismiss poorly translated news about Shanghai real estate auctions do so at the risk of missing out on one of the world’s greatest growth engines.
And speaking of missing out…
Finding Opportunities in the Chaos
When most people see volatility in the market, they panic. And we’ve seen the stock market endure an endless assault of chaos this year.
However, with every push and pull of the markets, opportunities open.
And master trader and 40-year market veteran Jeff Clark specializes in finding unique opportunities amidst market chaos. (You’ll recall Eric talking with Jeff about this subject in Wednesday’s Smart Money.)
In fact, 2008, 2020, and 2022 – three of the most devastating years for the average investor – turned out to be among the most lucrative years of his career.
Jeff used what he calls a “chaos pattern” to anticipate wild those market swings – and hand his readers over 1,000 winning trades during those time periods.
And his “chaos pattern” has just reappeared.
That is why on Wednesday, June 11, at 10 a.m. Eastern, Jeff is holding the Countdown to Chaos event, where he will detail everything you need to know about this “chaos pattern”… and how you can use it to find opportunities while others panic.
The event is free. But Jeff asks that you register for it now.
Jeff has teamed up with our corporate partners at TradeSmith to create a new powerful stock screener that looks for his “chaos pattern” every single day. His is unveiling this screener for the first time during the event.
If you have any money in the markets, or are concerned about what comes next, you won’t want to miss Jeff’s upcoming special event.
It is less than a week away. So, be sure to click here now to reserve your spot.
Regards,
Thomas Yeung
Markets Analyst, InvestorPlace
