Market Bargains for the Lunar New Year

There is a long list of items for investors to be concerned about right now — increased market volatility, rising credit stress, the growing probability of a global recession — and the list goes on.

But one item that you can take off your list, at least for this week, is China!

That’s because China’s domestic stock markets are closed all week for the annual Lunar New Year holiday. So at least we are spared from watching Shanghai stocks plunge day after day, putting other global markets under pressure.

China: A thriving, upwardly mobile, middle class.

That’s no small advantage when you consider the Shanghai Composite Index has plunged 46.5% from its high last June. The Hang Sang China Enterprises Index of Hong Kong listed Chinese stock has dropped 44.6%.

Where China’s stock markets go after they reopen from the weeklong celebration is anyone’s guess, but several Asian stock markets are looking dirt-cheap after the recent sell-off.

If only China’s economy can stabilize … at a growth rate of 6%-plus annually … the U.S. should have such growth “problems.”

China’s economy is struggling through a transition right now, which can be a bumpy ride at times. The nation is attempting to pivot from an export-led manufacturing-intensive economy to be more reliant on domestic consumption.

But by some measures, China is already succeeding on the economic front, in spite of its fractured stock market.

True, China’s industrial sector is going from bad to worse, with the Manufacturing PMI contracting steadily. But at the same time, China’s service sector — including financial services, retail, travel and leisure, health care and education — is thriving; more than making up for the slowdown in factory output. Consider these stats:

* China’s retail sales hit a record high of $4.2 trillion in 2015, and sales should top $6.5 trillion within the next 5 years, a 50% growth rate!

* Domestic passenger rail traffic is up 10% over the past year, and Internet traffic more than doubled last year alone.

* Last year, for the very first time, China’s middle class, at 109 million consumers, exceeded America’s middle class, at 92 million.   

And that’s the reason why the service sector of China’s economy is growing so rapidly: A thriving, upwardly mobile, middle class.

So if China is still expanding at such a solid clip, why isn’t it reflected by the stock market?

The answer: China’s domestic stock markets in Shanghai and Shenzhen aren’t very good leading indicators for its economy, unlike our stock market.

In spite of ongoing reforms, there still isn’t much institutional ownership of stocks in China, no thriving pension or mutual fund industry.

About 85% of stock trading is from individual investors, who view markets more like a Macau casino game than a serious investment.

China’s banks don’t invest much in stocks, either, and only about 1% of outstanding business loans use shares as collateral.

The stock market is pretty much a side-show in China, not a barometer of economic health.

But if you venture outside mainland China to the more fully developed and better-capitalized stock markets in the region, then you’ll find some amazing bargains right now.

For example stocks in Singapore (the Straits Times Index) are trading at just 11 times earnings, compared to a price-to-earnings (P/E) ratio of 16.7 times earnings for the S&P 500 Index.

Price-to-book (P/B) value is another time-honored measure of how undervalued a company or an entire country’s stock market is.

By this measure, Singapore shares are changing hands at a P/B of about 1, near the cheapest level since the darkest days of the financial crisis in 2009. By comparison, the S&P 500 has a P/B of 2.5!

But if you’re really searching for bargains in global stocks, look no further than the Hang Sang China Enterprises Index in Hong Kong. This index of leading Chinese blue-chip stocks listed in Hong Kong is trading at a P/E ratio of less than SIX times earnings (5.9 to be exact)!

And its P/B ratio is just 0.8! That’s even cheaper than during the financial crisis and well below its long-term average valuation.

Valuation measures like price-to-book and price-earnings ratios aren’t always good market-timing tools; what is cheap now can always get cheaper.

But for investors with a long-term view, the best time to buy a market, or an individual stock, is when it’s on sale at a bargain price. And the valuation measures in Singapore and Hong Kong today haven’t been this cheap in years.

In fact, the last time Singapore was this cheap in 2009, its stock market soared 73% over the following year. And the last time the Hang Sang China Enterprises Index reached this bargain level, the index surged 132% within a year!

An easy way to take advantage of these bargains in just two easy trades are: The iShares China Large-Cap ETF (FXI), which closely tracks the major Chinese stocks listed in Hong Kong, and the iShares MSCI Singapore Index ETF (EWS)

Good investing,

Mike Burnick

P.S. Why do Boris Schlossberg and Kathy Lien believe that currency investing offers a profitable alternative to traditional stock market investing?

Because to them, it seems far easier to spot a country that’s doing better than others than it is to pick the one best stock out of some 40,000 traded on Wall Street.

And it is also much easier to spot a nation in decline than it is to spot a stock that’s about to crash.

To learn more about currency investing, and to get on board with Boris and Kathy, click this link now.

Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.