A Journey Completed

Summary

As it’s been several months since my previous publication (due to travel) and I need to keep the chains moving (a football term), I have put together a few thoughts on recent observations as well as on my overseas travels.

Firstly, I do not have any new trade ideas to discuss at this time. I am currently holding the same allocation that I’ve discussed throughout the year which is mostly a long portfolio of Chinese value stocks, hedged with select Japanese tech and Australian bank stocks.

The outgoing bar fight between US-China has made this trade a little rocky, but its remains attractive, and I remain solvent (for now) so I’ll keep holding.

Secondly, although it’s late December, I don’t intend to comment on predictions for the year ahead. Given that I live in an international community, I’ve grown to celebrate Diwali, Christmas, Chinese New Year and various lunar holidays, and am conflicted on the appropriate year end.

In this article, I’d simply like to reflect on a few things that have influenced me in the past months and continue to shape my views and my asset allocation. It was certainly helpful to be away from the office for an extended period.

A visit to Old Milwaukee

During my recent stay overseas (a few months in Ontario), I enjoyed a road trip to visit a friend in Milwaukee. It was nearly a 12 hour drive, which was about 4 hours more than I planned.

I had intended to take the Lake Express across Lake Superior, but due to high waves the ferry was cancelled, and I had to go around the lake. Although I briefly contemplated staying overnight in Muskegon, the city was not exactly an ... attractive tourist destination.

Upon arrival in Milwaukee, nevertheless, I was greatly impressed by the city. I stayed in the Upper East Side and was impressed with the beautiful architecture and lovely lakefront. Within this older area of the city, it was a peaceful community.

I only stayed overnight as I headed onward to Chicago, in preparation for the marathon, where I had an equally peaceful stay in downtown. I greatly enjoyed the Art Institute, Millennium Park, Cultural Center and Giordano’s (deep dish pizza).

I must acknowledge that Americans are perhaps the most social and gregarious society. Everywhere I went, I found people approachable and very sociable. I was a spectator at the marathon, and it was very enjoyable to talk with many other spectators throughout the event.

I was treated very graciously and felt there was broader interest in Canada. I met lots of Blue Jays fans too. Thus, this trip largely reinforced the view that the US-Canada trade rift is political theater.

The US and Canada are economically integrated and are culturally aligned, with many industries co-dependent. NAFTA (and its predecessor the Autopact) is arguably the most successful reciprocal trade agreement ever.

I side with Premier Doug Ford on “how do you unscramble an egg” with respect to decoupling our manufacturing sector. As such, I remain with the view that those sectors impacted by tariffs, such as Potash and Energy producers, are attractively priced. Potash, in particular, is among my favourite commodity allocation.

As much as I’d like to see Canada carve out an independent trade deal with China, India and others, I think US-Canada trade policy alignment will remain the status quo. I’d be reasonably certain that the tariff war will be short lived. Thus, I’m still positive on the Canada resource sector in coming years.

White Elephants on Hengqin Island

Reflecting on a trip earlier in the year, I took a weekend getaway to Hengqin in April, which is an island that lies just south of Zhuhai, and a reasonably short commute from Hong Kong.

As I understand the economic development plan, Hengqin is intended as a convention and resort destination to complement Macau. Everything in the city appeared brand new and well designed. Even the city trees were all labeled with QR codes.

What caught my attention was the vast number of empty residential buildings. At least 20 high rises appeared vacant. Hengqin has an official population of 3,000, and thus appears to be over-developed. There was also a stunning 69-story International Financial Center (IFC), which appeared empty.

During my time in Asia, I have observed many vacant buildings, including the launch of Hong Kong’s IFC in 2004, which only a few years later managed to be fully occupied. However, I remain terrified of the over-development in China, and I don’t see how the surplus of housing stock will get resolved.

Nevertheless, I had a great visit. The Hengqin marathon was very well attended. I delivered at least a couple hundred high fives to support the local runners, who I believe were largely from the Zhuhai area, and I was happy to see many young, athletic and enthusiastic people.

I love China, and I’ve been to many 2nd and 3rd tier cities across the country. The rail and transit system is world-class and makes the entire country accessible. But, the country's dependence on infrastructure spending has me worried.

Having said that, it is also part of the bull case for my position in Chinese value stocks. China will need to migrate from a high savings economy (vis-a-vie infrastructure spending) to a consumption economy, and I believe policy will be shifted in that direction. I’ve heard some notable economists express this view.

This past year has already been positive for those Chinese high dividend stocks, and I’ll continue to hold and allocate to this sector. I would think that the momentum in that sector will remain positive.

Regardless, in 2026, I’ll certainly be taking the high-speed rail to participate in other races across the country.

Sayonara to the Asahi Plaza

In other recent news, I was approached unexpectedly by a buyer interested in acquiring a rental unit that I’ve held in Japan since 2007. I did not have the unit on the market, but was thrilled to receive their reasonable offer.

Reflecting on 2007, the pre-GFC era, the world seemed like a different place, and I acquired this unit without much thought. I was attracted to the potential for a high rental yield (over 10 percent gross) and I had a very positive view on Japan. I also wanted to get some experience and it has proven to be a great education in a very unique property market.

I’ve kept good records of all the income and expenses over the years; in 17 years, I’ve had 7 tenants and the unit was vacant only for 14 months. My derivation of the net rental yield has been 8.3% (in $HKD) . In light of the depreciation in the Yen (¥), there is no material capital appreciation (in $HKD).

Overall, I’m very happy with this investment as it was low-touch and provided reasonable cash flow. I would describe Japan as a very good rental market in many respects: tenants are honourable; the costs of upkeep are reasonable; taxes are manageable (albeit cumbersome).

I didn’t ask for any colour on the buyer, but I believe it’s a local Japanese investor (not an end user), and they are attracted to the rental yield and I assume the potential for appreciation of the ¥. These were my initial objectives too.

I was actually agnostic about selling the unit, but I also wanted to get experience at that process, which is proving to be another education. I would certainly consider investing in Japan property again, and now I have a better idea of the overall process.

I discuss this now because Japan, more specifically the ¥, and Gold have been the two more prominent stories this year. I do not believe that there are any coincidences in life, and the fact that a local Japanese is proactively investing in property, could potentially be an indication of the long-awaited repatriation of wealth into Japan.

This has been speculated for many, many years, but this is first time in decades that Japanese bond (JGBs) yields are actually more attractive than US Treasury bonds, which could be an inflectionpoint for both domestic and international investors, and strengthen the ¥.

As a starting point, I suggest that you compare the price of various items in the grocery store on your next visit. My favourite brand of Japan’s yogurt, Meiji, is certainly cheap.

Alas, I remain hopeful that we may see renewed strength in the ¥. I will not be converting the proceeds of my property sale, in any case; I love yogurt too much.

A Journey Completed

Lastly, I am also approaching a milestone that has given me pause to reflect on life’s journeys. Dec 17^th marks my silver anniversary of being approved to work in Hong Kong. What an adventure it’s been.

One such memory that I recalled recently was my “baptism by fire” introduction to the Hong Kong property market, where I almost lost a bundle before I had even worked a single day.

HK in those days was a wonderful place for young people, but it was a big adjustment from Canada, and in particular a very expensive place to live, with a lot of upfront costs. The standard contract for renting a flat, for instance, was a 14-month contract, which included 1st months rent up front, 2 months security deposit, and ½ months rent in brokerage fees. Thus, you had to put a lot of money down before collecting your first paycheck.

I initially rented a small flat in the mid-levels, and after paying my 3 ½ months rent ($’K), I came home about 10 days later to find a notice of foreclosure on the door. The landlord had taken my deposit and fled town.

Despite the stress, the story had a good outcome as I negotiated with the bank to stay in the unit for 6 months and thus ended up coming out ahead. It had never occurred to me that landlords were so heavily leveraged, and that I’d have counterpart risk as a tenant.

It’s been well documented that Hong Kong in the 1990s had poor lending standards and that many had speculated in the property market with little down payment. I think my landlord owned 4 or 5 properties.

Although HK’s market had peaked in ‘97, the market stress was only in early innings by Dec ‘00. Foreclosures were just keeping started during my arrival, and the rental market was still looking in the rear view. Units were vacant for months, yet landlords would decline rental offers below market. At the time, it was a city of stubborn landlords :)

I only reflect on this story as it shaped my understanding of the dynamics of the property sector. It can take a very long time for the market to reach an equilibrium, and a very long time before foreclosures become common.

And so, I do not think that we’ve felt the impact of China’s property sector decline. What was once the largest asset class in the world, the sector has declined by over 80 percent.

What I find interesting is that this gets little attention in international markets. For the past decade, Chinese have represented the majority of the marginal buyers in Sydney, Vancouver, London and elsewhere.

And how were these overseas properties financed? Chinese investors would borrow against their domestic properties or purchase an insurance product that had a large cash advance. The Chinese property market is the collateral in overseas purchases.

I am still of the opinion that there will be knock-on effects yet to be felt around the world. I’m particularly concerned about Canada, where there was a frenzy of activity for the past decade, but now there is a historical glut of condo supply.

So, I don’t see how Canada’s largest lender, the Royal Bank who acquired the Canadian mortgages of the largest overseas leader HSBC in 2022, hasn’t been impacted; thus far. Perhaps the lag effects that I felt in Hong Kong in 2000 are similarly working their way through the Canadian system.

In any case, these are just a few of my thoughts heading into the festive season. No major shift in strategy, just stay with the current course. As always, I remain hopeful.

And, I only just noticed that Hong Kong immigration had stamped my passport as “journey completed”. As I’m still enjoying many new adventures each year, I must beg to differ.

Seasons Greetings and Joy to the World!