Greetings from Hong Kong…
I just had dinner with the Churchouses… It's one of my favorite things in the world to do.
There's hardly a man who's more knowledgeable about Asian investing than Peter Churchouse…
Peter has spent more than 35 years in Asia, including 16 years with Morgan Stanley (as the firm's head of research there at his peak). He then left the company and started his own hedge fund. Today, he writes the excellent Churchouse Letter (which I highly recommend).
"What's your favorite investing value in the world right now?" I asked.
He replied, "Did you know there's a place where the dividend yields are higher than the P/E ratios?"
If you're curious, that never happens…
No such place could exist. It's too extreme…
For example, today, the price-to-earnings ratio (P/E ratio) of U.S. stocks is 24. The dividend yield is 2%.
For the dividend yield on U.S. stocks to be higher than the P/E ratio, U.S. stocks would have to have their worst crash since the Great Depression. It's almost against the laws of nature for stocks to pay a dividend yield higher than their P/E ratio.
"This situation exists – today – in Chinese property-development companies listed in Hong Kong," Peter told me.
He isn't just looking at some spreadsheet of numbers… He knows what he's talking about… Peter has covered property in Hong Kong since 1980 (yes, 1980).
Before our dinner, he attended a board meeting of a multi-billion-dollar, Hong Kong-listed development company, where he serves as a director. This company pays a dividend in the 5% to 6% range. And it is safe… Its debt-to-equity ratio is a scant 3% – meaning it hardly has any debt at all.
When I got back to my room, I looked up what Peter said… Sure enough, there are a handful of developers paying 5%-plus dividend yields and trading at forward P/E ratios of around five.
That's just crazy. (The names I found include: Country Garden, Shimao Property, Agile Property, Guangzhou R&F Properties, and KWG Property.)
I asked, "What's the simplest way to play it?"
"Just own the big H-shares," Peter said.
And that is easy to do…
The iShares China Large-Cap Fund (FXI) holds "the big H-shares."
These aren't the speculative names… These are China's blue-chip companies. While many of the firms in this fund aren't household names in the U.S., they are in China.
According to the iShares website, this fund is currently trading at a single-digit P/E ratio, and has a distribution yield of 4.45%. It's not a play on China's ultra-cheap property stocks… But it is much safer and still very cheap.
"You just want to stick a handful of the big H-shares in a drawer, and not look at 'em, and come back in a few years. I expect you'll be a happy man," Peter said.
I agree. That's why we have FXI on our True Wealth recommended list today…
P.S. For more on Peter's excellent Churchouse Letter, click here.