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Last week, I wrote about Chinese stocks being grossly oversold and pounded the table, urging you to take advantage of that profitable anomaly by being an aggressive buyer.
I sure hope you listened to that advice.
I say this because the Shanghai Composite Index surged by 9.3% last Thursday, the largest single-day advance in seven years. And that came on the heels of a 4.2% run-up the day before, so we’re talking about almost a 14% moon shot in just two days.
To put that mega-gain into perspective, the Dow Jones Industrial Average would have to skyrocket by roughly 1,800 points to equal that! The Wall Street crowd would be dancing naked in the streets if that happened at the New York Stock Exchange.
Today, we have to talk about China or more specifically, why last week’s dramatic bull-run is likely just a hint of the thundering stampede to come.
After all, Beijing just put the world on notice …
The Chinese government will NOT allow
its stock market to fall any further!
What was the fuel for the Shanghai rocket? The Chinese government sent a clear signal to investors, announcing two major policy changes last week designed to prop up the ailing market …
Cheaper trading costs. The stock transaction tax, known as the stamp tax, was reduced from 0.3% to 0.1%. This move actually reverses a year earlier move when the Beijing bureaucrats raised the tax to cool what was then an overheated market.
This combination of a reduction in transaction costs and a decrease in sell volume proved to be a powerful elixir and that’s why the Shanghai market took off. The buying frenzy wasn’t concentrated just on the big name stocks either. Shares of over 200 different companies hit the daily 10% up-limit on Thursday.
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| With the Olympic Games little more than 100 days away, Chinese leaders are determined to keep the Shanghai Composite Index on track. |
More importantly, this shows just how determined the Chinese leaders are to keep their markets vibrant, healthy, and moving higher while the global spotlight is focused on Beijing with the Olympic Games right around the corner.
What most investors don’t understand is that communist countries don’t have to play by the same rules that we do. The Chinese leaders are very willing and very able with their $1.6 trillion war chest of cash reserves to manipulate their stock market.
A bunch of lever-pulling bureaucrats, however, is NOT the reason you should invest in China. The reason to invest is that …
The Chinese economy and Chinese
companies are growing like mad
and making mountains of money.
Consider for a moment that the average profit growth rate in the first quarter of 2008 for the 436 Chinese companies listed on the Shanghai and Shenzhen stock exchanges was an astonishing 50%!
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That’s not a misprint — 50 percent!
That’s the kind of corporate profit growth that you get on the heels of an economy that expanded by 11.9% in 2007.
But you know what really gets me excited? The fact that even after last week’s incredible explosion to the upside, the average Chinese stock is now trading for only 21 times earnings.
That may not sound cheap on the surface, but it is dirt cheap in a country that is growing at a double-digit rate and especially cheap when you compare it to the S&P 500 which is selling for 22 times earnings.
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| An opulent tower of marble and mosaic, the widely acclaimed Lisboa Hotel and Casino in Macau symbolizes China’s new era of power and wealth. |
Would you rather pay 21 times earnings for the stocks of a country that just grew by 11.9% or would you rather pay 22 times earnings for the stocks of a country that is on the verge of — if not already there — a recession?
The answer is pretty simple in my book. You’ll get much, much more bang for your investment buck in China than anywhere in the world.
Most investors understand this; it’s merely a question of …
HOW to add Chinese exposure
to your investment portfolio
I’ve briefly outlined five easy ways to invest in China below. My advice would be to give careful consideration to each strategy as a part of your overall emerging market investment objectives.
#1.) Exchange-traded funds: We’ve been telling you a lot about exchange-traded funds (ETFs). That’s because these investments can give you a diversified stake in a particular sector, index or country in one shot.
There are several ETFs that can give you direct exposure to China and its mega-growth neighbors, but the iShares FTSE/Xinhua China 25 Index (FXI) is the most popular Chinese ETF.
#2.) Mutual Funds: ETFs are great, but don’t forget about traditional, actively-managed mutual funds, either. Some of my favorites are U.S. Global’s China Region Opportunity (USCOX), Fidelity’s China Region (FHKCX), and T. Rowe Price’s New Asia (PRASX).
#3.) Chinese companies trading on U.S. exchanges: As I pointed out earlier, more than 100 Chinese companies are listed on U.S. exchanges. What’s more, they are some of the largest and most profitable companies in all of China.
#4.) Chinese companies trading on foreign exchanges: A lot of really attractive Chinese companies are listed on the Hong Kong Stock Exchange, and others can be found on the exchanges in Singapore and London.
If you’ve never bought a stock on a foreign stock exchange, you’ll be surprised at how easy it is. All you need is a broker with an international trading desk and the ticker symbol of the stock!
#5.) U.S. companies doing big business in China: U.S. companies have been doing business in overseas markets for a long time. But these days, some American firms are getting the bulk of their revenues from outside the U.S.
For example, both Yum Brands — which runs Pizza Hut, Taco Bell, and KFC — and casino company Las Vegas Sands both garner more than half of their sales from outside the U.S. In other words, even carefully selected U.S. companies can give you a very significant stake in China!
Which of these investment strategies is right for you? The answer depends on a lot of things: How aggressive you are, whether you’re more of a do-it-yourselfer, and how focused you want to get.
But the most important thing is that you take a hard look at adding some Chinese investments to your portfolio. That’s where I continue to see the biggest profit potential.
Best wishes,
Tony
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Mathias Korzan, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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