The Industry Still Booming: Including in China

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For everybody still bracing for a major stock market crash, today’s Daily Reckoning asks you to take note of one thing.

There’s no shortage of cash out there that can come in and buy up a lot of stocks.

The Wall Street Journal reports that US pension funds have the highest cash levels as a percentage of their assets since 2004.

Mutual funds aren’t far off the same level. Their percentage of assets held in cash is the highest since 2007.

Some of the funds are defensive from their market outlook. Others are just expecting redemptions and payouts to rise.

I wonder how long these levels can last though. I’d expect the fund managers to buy up any lows in the stock market. Here’s why.

Holding cash earns you zero in the US.

The mutual and pension funds aren’t going to make the returns they need with a figure like that.

They’re not going to find it much better in the bond market either.

The yield on a 10-year US Treasury note is 2.071%. That’s a pittance. Inflation will neutralise it anyway.

That means they’re going to have to put their money into stocks and real estate at some point.

Warren Buffett appears to be taking that view…

Long term investing — even at 85

Colleague Jody Chudley reports this week that Buffett recently bought stock in Seritage Growth Properties for his personal portfolio.

That’s according to filings Buffett is required to submit.

Seritage is a Real Estate Investment Trust (REITs).

REITs usually pay out 90% of their rental income as dividends to shareholders.

The higher the rents, the more they pay out, obviously.

The properties Seritage owns were spun out of the Sears retail business. That’s why Seritage currently leases most of its properties to Sears or Kmart.

Those two retailers are struggling. Jody suspects that Seritage is going to slowly reduce its exposure to Sears and bring on other tenants.

These tenants will likely be paying four times the rent Sears currently is, according to Seritage’s own investor presentation last year. That’s what Buffett sees in the future.

Now, the shift in Seritage’s portfolio is going to take time.

The important point is Buffett sees upside to US real estate and is buying a long term play — even though he is due to turn 86 this year.

Throughout his career Buffett has often echoed the JP Morgan quote that a man will go broke shorting America.

It’s not as if there’s no growth in the world, anyway. Just consider the industry booming as we speak…

16.8 billion dollars and 66 new airports

It’s called the travel industry, especially Chinese tourism.

That’s why Buffett bought a company Precision Castparts last year for US$37 billion. It’s one of the biggest deals he’s ever done.

Bloomberg reported at the time that,

Warren Buffett is wagering that increasing world travel, especially in Asia and emerging markets, will buoy the aerospace industry for years to come.’

He’s looking right so far.

Bloomberg reported this week that China will allocate about US$16.8 billion this year for investment in civil aviation ‘to improve infrastructure to cope with surging air-travel demand and bolster economic growth’.

Just this year that means domestic and international airlines will start more than 200 new overseas routes this year out of China.

Air traffic rose 11.4% in China to 440 million trips in 2015. China also plans to build 66 new civil airports in its next five year plan.

This surge in travel from China’s middle class is reverberating around the world.

The number of people flowing to China from London’s Heathrow rose 14% in 2015 compared to the previous year.

2015 was a record year in terms of passenger numbers for Heathrow.

The Sydney Morning Herald also reports that the number of Chinese visitors to Australia within 12 months surpassed a million for the first time.

That was a rise of 21.6% to November 30 last year.

By 2020, they’re expected to overtake New Zealanders to be the number one for short term arrivals.

That’s fantastic news for Australia’s travel and leisure industries.

Chinese tourists outspend New Zealanders by 200% according to the Australian Bureau of Statistics.

Sydney Airport [ASX: SYD] now has six mainland Chinese airlines flying in. That’s 70 flights a week — double what it was five years ago.

It’s no exaggeration to say that, should Chinese tourism continue to develop, practically every airport in the world will need to be extended, rebuilt or expanded.

It’s just another reason why, over at Cycles, Trends and Forecasts we’re positioning for the biggest boom of all time.

Find out how to take advantage here.

Best wishes,

Callum Newman,

Associate Editor, Cycles, Trends and Forecasts

Ed Note: This article was originally published in Money Morning.

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Callum Newman

Callum Newman

Callum Newman is the editor of The Daily Reckoning and Associate Editor of Cycles, Trends and Forecasts. He also hosts The Daily Reckoning Podcast. Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect. To have Callum’s thoughts and insights on the current state of the currency, commodities and stock markets delivered straight to your inbox, take out a free subscription to The Daily Reckoning here.
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