Bargains Galore In China
One of the big surprises this year is the anemic performance of the Chinese stock market. In an ironic twist of fate, the world’s fastest growing major economy is sporting the second worst market losses this year. Only debt troubled Greece has endured a bigger decline.
Year to date the Shanghai Composite Index is down more than 26%. The big drop has market experts scratching their heads. Most of these soothsayers entered 2010 forecasting a strong first half for Chinese stocks.
So what’s happening with the Chinese market?
After last year’s big gains, investors have been scampering to book profits. The selling started when the Chinese government announced measures to slow economic growth. Government officials were worried the economy was in danger of overheating.
These concerns were clearly justified.
In the first quarter, the Chinese economy grew at a blistering 11.9% annual rate. To nip inflation in the bud, the government tightened bank lending just a bit. Essentially they were trying to tap the brakes on an accelerating economy.
But, as usual, investors feared the government would ultimately slow growth too much and kill the fledgling economic recovery. Naturally they moved money out of stocks and into safer investments like bonds.
Then the European debt crisis hit.
A big part of China’s economic growth flows from exports to Europe. The prospect of Europe sliding into a double dip recession sent many investors over the edge. They were no longer worried about slower growth… they were petrified China itself was sliding into recession.
These fears gave rise to another bout of selling which sent the Shanghai Index on another leg down.
I think the China bears have finally reached the point where prudence becomes overreaction. The chances of China sliding into recession are remote at best.
Strong exports to the U.S. and Asia should offset any decline in exports to Europe. And the Chinese government’s decision to unpeg the Yuan from the U.S. Dollar helps curb inflation and deflate asset bubbles.
I’m not the only one who sees strong growth ahead for China.
The International Monetary Fund just raised their growth outlook for China. They’re now expecting China’s GDP to grow 10.5% this year. And they’re expecting GDP growth of 9.6% in 2011.
Top economists are forecasting nearly the same growth rates. In a recent Bloomberg survey of 14 economists, the average estimate was for 10.2% growth this year and 9.2% growth next year.
These forecasts are taking into account everything that’s happened so far this year. They factor in Chinese monetary policy, the slowing European economy, and more.
I’m convinced the Chinese economy is not going to slide into recession. Now the question is whether the time is right to buy Chinese stocks.
The answer to that question is an emphatic YES!
Chinese stocks are at bargain basement levels by almost every measure. For example, the Shanghai Composite Index’s P/E ratio of 18x is the lowest in a decade.
But here’s the most telling indicator.
Company insiders are pouring their own money into Chinese stocks. Last month, shareholders owning at least 5% of a company’s shares increased their holdings by a whopping $162 million.
The last time we saw buying like this was October 2008. It marked the end of a year-long bear market in the Shanghai Composite. And the index went on to post gains of 82% over the next twelve months.
Morgan Stanley’s China Strategist is expecting a similar rally this time around. He’s forecasting a 65% gain in the Shanghai Composite by June 2011.
This is definitely one rally you don’t want to miss.
However, let me give you a word of caution. Investing in Chinese stocks is not easy. Wall Street research coverage of Chinese stocks is scant at best. You have to do most research on your own.
This is difficult and time consuming work.
Fortunately, there’s an easier way to get top notch research on select Chinese stocks. Take a subscription to one of my advisory services.
I’ve recommended a number of Chinese stocks in Penny Stock Breakouts and The Penny Speculator. And with the recent market decline, most of them are screaming buys.
Category: Foreign Markets
