China Stocks: Big Bargains In Chinese Stocks

| February 8, 2011 | 0 Comments

China bashing is the latest fad in financial journalism.  Every day the news carries article after article criticizing the Chinese economy, Chinese government, Chinese companies, and most of all, Chinese stocks.

This merciless campaign of negativity has been going on for months now. It seems like China’s economic challenges are bringing the critics out of the woodwork in droves.

I’ve noticed a strong surge in anti-China propaganda recently.

The most virulent attack from a well-known public person happened earlier this week.  The only thing stranger than the comments themselves was the source… real estate tycoon and reality TV star, Donald Trump.

The Donald stunned viewers of CNN’s Piers Morgan Tonight with an anti-China tirade that would have made Joe McCarthy proud.  When asked about his views on China, Trump said in his usual no-holds barred style:

“I see them as the enemy… they want to take over [the US] economically.  They are not really out-competing.  They are cheating…”

The anti-China rhetoric is definitely starting to boil over.

Now, Trump’s comments are clearly politically charged… he’s considering a run for president in 2012.  But I’m seeing a more subtle form of China bashing in all kinds of mainstream publications.

The media is having a field day with China.

Numerous articles are predicting a coming collapse for the Chinese economy.  And even more articles are saying the Chinese stock market is a bubble on the verge of bursting.

I have to say, this is music to my contrarian ears!

All of the negative sentiment about China is creating a terrific investment opportunity in Chinese stocks.

First off, the Chinese economy is strong and continues growing at a rapid rate.  Last year China’s GDP grew by an astonishing 10% (despite the ongoing global recession).  And according to Bloomberg, many economists estimate China’s GDP will grow by 9.5% in 2011.

That’s robust growth any way you slice it.

Keep in mind, the Fed is predicting US GDP will grow 3.9% this year.  (If we’re lucky!)

The Chinese government is slowly but steadily raising interest rates in order to curb inflation without sending the economy into recession.  The anti-China crowd claims, however, that higher rates will crush economic growth.

This is plain hogwash.

I think it’s much more likely the government’s policy of measured interest rate increases will bring China’s high flying economy down for a soft landing.  In other words, I’m expecting a combination of strong growth and manageable inflation in the second half of 2011.

You can’t ask for a better economic backdrop for Chinese stocks!

Speaking of Chinese stocks, I don’t see any evidence of a bubble.

A couple of weeks ago Bloomberg Businessweek presented a compelling case that Chinese stocks are nicely undervalued.  The article noted how the valuations of the MSCI China Index (mainland Chinese stocks) and the MSCI Hong Kong Index (Chinese stocks traded on Hong Kong exchange) are the widest they’ve ever been.

At the time, the MSCI Hong Kong Index was trading at a lofty 17.5 times estimated 2011 earnings.  The MSCI China Index was valued at just 11.6 times projected profits.

Here’s the kicker…

The last time Chinese stocks were this cheap compared to Hong Kong’s was in June 2004.  Chinese stocks were just two months into what became a 42-month raging bull market.

From that point, Chinese stocks went on an historic upward climb. The MSCI China Index mushroomed fivefold in value.  And the index’s P/E grew from 12.5 times to an astonishing 31 times.

Since the Bloomberg Businessweek article was published, the Shanghai Index has moved higher by 6%.  It’s looking more and more like history is setting up to repeat itself.

If you’ve been avoiding Chinese stocks, now’s the time to establish a position.  The easiest way is to pick up shares of a China ETF.

The one I like the best is iShares FTSE China 25 Index Fund (FXI).  This ETF invests in large cap Chinese growth and value stocks.  And it’s the most popular with investors (average daily volume is 9.9 million shares).

Don’t miss your chance to go against the crowd and rack up huge profits in Chinese stocks.  Keep in mind… an opportunity like this one doesn’t happen very often.

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Category: Foreign Markets

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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