You now have a chance to profit from one of the biggest trends in the United States economy today. Warren Buffett spotted an opportunity in construction stocks, buying names like D.R. Horton (NYSE: DHI) and others, foreseeing a boom in residential construction to hit the market shortly. While there is still time to get into the homebuilders, there are plenty of other places to make money.
However, not all real estate stocks are made equal. Across the world, the real estate market in China is causing concerns for international investors, but that’s a thing of the past. As the CSI 300 index (China’s version of an S&P 500) bounced off five-year low prices, some U.S. investors and institutions believe stocks like KE Holdings (NYSE: BEKE) could soon see triple-digit upside on a swift comeback.
Mega investors like Michael Burry (the guy who called the 2008 financial crisis) and even Ray Dalio have come trickling into Chinese markets. By buying into the iShares MSCI China ETF (NASDAQ: MCHI), Ray Dalio admitted to Wall Street that he sees a new bull run up ahead. In actual value investing fashion, Burry has directly invested in the nation’s blue-chip stocks like Alibaba Group (NYSE: BABA).
Contagion Effect
Investors looking to gain exposure to the real estate sector may have exhausted their options in the U.S. stock market. After all, D.R. Horton and others are making all-time highs and providing very few—if any—discounts today. Despite all the explosive growth they can have, future earnings are already priced into the stock price.
Outside the direct real estate construction or investment trust (REIT) industries, there is minimal upside left. Even transaction and operation names like the Zillow Group (NASDAQ: Z) propose only a 2% upside in its $58.8 price target after making a new 52-week high price.
At the risk of a contagion effect in profit-taking across the U.S. names, more investors may join Burry and Dalio in their hunt for real estate value in other nations like China.
You see, stocks in Asia’s powerhouse are driven by fear today, so the average dividend yield (3.6% for the ETF) is much higher than the 2.5% Chinese government bond yield today.
Taking fear out of the equation, any other stock market would have attracted a massive inflow of investors, considering the upside opportunity in stocks compared to the nation’s bonds. Here’s why Chinese real estate stocks could give you additional alpha in the turnaround.
As of 2023, roughly 23% of Chinese citizens chose to invest their capital into stocks. Most of the Chinese investor base prefers more traditional investments like real estate. Betting on an economic revival, Burry and Dalio could point you toward KE Holdings.
About to Boom
Realizing how low the market had gotten, the Chinese government decided to increase its stimulus efforts. By injecting up to $278 billion into the economy and lowering interest rates, the Chinese consumer and investor could soon return to the field and move some money around.
Inflation readings in China came in hotter than expected last week, with a 0.7% reading versus a consensus of 0.4% set by economists; it can be said that the latest stimuli are making their way to the Chinese consumer. This doesn’t mean you can blindly bet on Chinese stocks; here’s who is buying KE today.
Investment house and bank Barclays (NYSE: BCS) has upped its stake in KE stock by 82% in February alone, catching onto the latest tailwinds pushing the stock’s drivers. The Vanguard Group followed suit by increasing its exposure in the stock by 0.2%, which comes out to be around $830,000.
There is another institution pointing to the potential upside in this play; HSBC Holdings (NYSE: HSBC) boosted its price target on the stock up to $24 a share, calling for a rally of roughly 100% from today’s prices.
Barclays has left its price target of $28 a share unchanged through the year, calling for a 122% upside in the stock they have been quietly accumulating.
Considering that KE stock trades at only 11.8x price-to-earnings (P/E) ratio, compared to Zillow’s significantly higher 33.2x, you can rest assured that you can find a deep discount in China’s version of online real estate transactions platform.
If investing in China is still too risky for you, there is a way to diversify yourself in real estate. The Vanguard Real Estate ETF (NYSEARCA: VNQ) gives you broader exposure to the sector with no added risks.
However, if you too believe that China is on a comeback, with stimulus about to spark more real estate activity, then KE could be worth the bumpy ride for excess returns.