I’m Buying China – Chinese stocks are cheap and for no good reason
Emerging markets got smacked in the latest global slowdown. China, which had and is booming at record rates of 10% per year saw its stock markets lose a whole lot of value. I think the best place to be right now is in the emerging markets scene as turnarounds in developed areas will create even bigger booms in the growing economies of the world.
The China 25 Xinhua index is in my opinion the best way to play a boom in China. The index is similar to the Dow Jones here in the states and tracks all of the biggest companies and industries in China.
What I like the most is that Chinese blue chips are more like our growth stocks. They’re relatively cheap with PEG ratios near 1 and they represent the best of breed. When I buy blue chips I’m happy with 8-10% growth rates but would be angered to see the same growth out of a Chinese stock.
Chinese stocks have a natural lift to them because of the Chinese economy. When the economy is growing at a 10% clip, its difficult for any business to post a slowdown. By nature all Chinese businesses have the growth of the economy to back them up.
Back to the charts…
In the chart above FXI (the ETF for the China 25 Index) was ruffled up over the past two years. Speculators poured into China and inevitably created both a bubble and a burst, I think we’re in a position to see another bubble soon.
What happened in China was just like what happened here with the tech industry. Companies were “fairly valued” but the valuations were including 40 years of earnings rather than the usual 10-20 for blue chip stocks.
Then deleveraging happened. Investors took money out of China to bring back home to even out their balance sheets and the index lost 66% of its value and met levels unseen since late 2006.
I think we’ll be going through the market cycle once again. This market is worth more than it was in 2006 and frankly after a few years will be worth again what it was during the 2007 boom. China is turning towards economic freedom and its helping, not to mention they’re the largest creditor nation in the world. If they don’t make it, they have a stake in something that does. And if they don’t have a stake, they’ve loaned billions to a foreign government.
I hereby declare that the bottom is in for China
