Guest Post: Hong Kong and Macau undervalued

[Editor’s Note: Tim Staermose is filling in for Simon today from Macau]

June 3, 2011

When you read these reports about the “most expensive places in the world,” there are a few that routinely top the lists. Hong Kong is one. Macau, with its glitzy and glamorous lifestyle, is starting to make an appearance as well. Real estate aside, these places are actually quite cheap.

To give you an idea about cost of living, a long seafood lunch here in Macau for 3 people with about 4 courses, washed down with beer and two bottles of Portuguese wine, came to less than US$75 in total. This was in one of Macau’s most charming, world-renowned seafood restaurants.

Our hotel, an old-world, colonial-style complex affiliated with the Macau Institute for Tourism Education, cost all of US$77 a night. There were no taxes or service charges, and the price included a full, cooked breakfast and complimentary welcome drinks for two.

We took taxis all over Macau and never paid more than US$12 for a fare. An exquisite main course in the private dining room at Clube Militar de Macau, where my friend has access, was only about US$18. Not bad for a true five-star experience.

There are many places in the world where the same thing will cost you 3 or 4 times that much nowadays.

Regarding Hong Kong, Simon and I were talking recently and he remarked how, during his last trip to Hong Kong (Central), he spent less than $20 one afternoon on lunch, a haircut, his dry cleaning, and a few incidental groceries.

As a Hong Kong permanent resident, my own experiences outside of real estate have been similar.

These low living costs in US dollar-linked currencies such as the Hong Kong Dollar and Macau Pataca (which are used interchangeably in the former Portuguese colony) may be due for a bounce.

Over the medium to long-run, the theory of purchasing power parity says that, setting aside any local price distortions such as taxes, similar goods and services of the same quality should generally be priced at about the same level over time, no matter where in the world you find yourself.

This is the same theory that drive the Economist’s famous “Big Mac Index.”

On this basis right now, places such as Hong Kong and Macau are cheap, which means that they’re terribly undervalued. Cost of living disparities are the market’s way of putting pressure on exchange rates and suggest that these rates should rise.

I’ve argued before that holding Hong Kong dollars gives US dollar holders a free ‘call option’ on a rise in the HK dollar. If Hong Kong maintains its peg, you have lost nothing in USD terms. If Hong Kong succumbs to the market and raises the exchange rate, you stand to gain.

Meanwhile, if you’re looking for a great, surprisingly cheap place to spend time, give this part of the world a try, especially Macau.

About the Author

Tim Staermose is Sovereign Man's Chief Investment officer, based in the Asia-Pacific region. Born to a Danish father and British mother in Dar Es Salaam, Tanzania, Tim has led an international life since the day he was born. He has lived and worked throughout Asia, primarily focusing on equity research and emerging market opportunities.