Why I'm still bullish on China ...
Stock-Markets / Chinese Stock Market May 16, 2007 - 09:48 AM
Tony Sagami writes: Most of the investors I talk to these days are pretty pleased with the performance of their stock and mutual fund portfolios. After all, the Dow Jones Industrials started the year at 12,463 and marched right through 13,000.
That's pretty good, right? Well, I've never met a profit I didn't like. However, anybody that had some of their portfolio invested in China could have done much, much better. In fact, they could have done up to 10 times better!
That's not a misprint … up to 10 times better!
Last week, the Shanghai Composite index busted through the 4,000-point milestone barrier like a hot knife through butter. And get this — the index is up about 51% so far this year!
This isn't a new trend: The Shanghai Composite was sitting at 1,200 two years ago … it more than doubled in 2006 … as recently as March it was sitting at 3,000!
No question, the China market is red, red hot. More importantly, I believe we're only in the third or fourth inning of the most profitable game we will see in our lifetimes.
That doesn't mean there won't be corrections along the way. Heck, I can practically guarantee that there will be. Some may even be very painful. Look at what happened in February, when the market tumbled 9% in a single day!
Still, while most experts were crying "wolf," I didn't pull any punches. I told you to stay focused on the long-term and use the drop as a buying opportunity. My words:
"There are many reasons to expect the damage to be limited. The most fundamental of these: The market's action doesn't do a single thing to change China's juggernaut economic growth."Anybody who listened made out like a bandit. Reason: The market recovered all its losses in less than a month and has been on a roll ever since.
Now, a steady stream of experts (many of whom have probably never set foot in China) are still doing their best to discourage you from jumping on the Asia bandwagon. They're dredging up all kinds of reasons to stay away from the region, using words like "bubble" and "crash."
Today, I want to address some of their top concerns …
Why Rising Interest Rates and Reserve Requirements Don't Matter
For the second time in a month, the People's Bank of China ordered an increase in reserve requirements, an attempt to cool down credit growth.
Chinese banks must now keep 11% of their deposits, up from 10.5%, in reserve at the central bank starting today. This is the seventh increase in reserve requirements since June 2006.
Meanwhile, the Chinese wield the blunt instrument of monetary policy just like we do in the U.S. When they think the economy is running too hot, they raise interest rates to try and cool economic growth.
Over the past year, the central bank has raised rates four times, most recently in March by 0.27% to 6.39%.
The naysayers will point to rising rates and reserve requirements as big red flags.
Here's my response …
All bull markets are liquidity driven … the action in China is no exception.
Because of the booming Chinese economy, and the country's position as the manufacturing center of the world, it is running close to a $20-billion-a-month trade surplus.
That $20 billion isn't an entry on a ledger. It is real, cold, hard cash that flows to Chinese businesses and the employees who work there.
Some of that cash will get spent on food, clothes, and at the malls. Another big chunk of it will find its way into the Chinese stock market.
This is why the interest rate and reserve requirement increases haven't slowed down the Chinese economy or the Chinese stock market one bit.
And unless you think that China's trade surplus is going to disappear sometime soon (I sure don't think it will!), you have to believe that the liquidity driving the stock market is far, far from over.
What About All the Bubble Talk You're Hearing?
Because their other tactics haven't been able to slow down China's economy or its stock market, Beijing officials have tried their best to jawbone the markets down.
Chinese Premier Wen Jiabao warned last week that his "mind is full of concerns." And when Zhou Xiaochuan, the head of the People's Bank of China, was asked if he was worried about a stock market bubble, he tersely said, "Yes."
The China naysayers have latched onto these comments. They've also pointed to the massive number of new Chinese investors coming onto the scene as evidence that it's "déjà vu all over again."
Chinese citizens opened 4.79 million new brokerage accounts — about 90,000 a day — just in the month of April. There are now more than 91 million individual accounts in China.
To put that into perspective, only 3.08 million accounts were opened in all of 2006. And the Chinese are putting those accounts to good active use. Trading volume spiked to a record 307 billion yuan ($40 billion U.S.) last week.
The bears will also point out that the average mainland Chinese stock is now priced at 50 times 2006 earnings. That's a pretty high level even for an economy that has grown by more than 10% a year for the last four years in a row.
Here's my response to the "bubble" concerns …
First of all, any froth and speculation is confined to the mainland China markets in Shanghai and Shenzhen. That's because those are the only markets that Chinese citizens are allowed to invest in.
In other words, even if some of those stocks are overvalued and get punished, Chinese investors will feel the most pain … not us.
And what about those comments from China's officials? Well, Alan Greenspan made similar comments in 1996 with his "irrational exuberance" speech.
You know what happened? The market went absolutely bonkers for a few more years!
Look, the Chinese officials are doing exactly what they should be doing with their warnings about excessive speculation and bubbles. The time to get worried is when the government numbskulls lower interest rates and tell the public that everything is fine and dandy!
Still, Boots on the Ground Are Better Than Speculation from an Ivory Tower
I don't mean to sound cavalier … there are always real risks out there. However, I think the bull market in Asian stocks has a lot of room to run.
Of course, seeing is believing. That's why I'm on my way to China as you read this. I have meetings scheduled with Chinese bankers, brokerage firms, business professors, business leaders, and regular, everyday Chinese people. It's the best way I know of to ensure that my enthusiasm is warranted.
I'll be in Asia for 21 days, and the trip will cause me to miss a lot of my boys' baseball games. But there's no way around it — no amount of number-crunching can replace in-person visits to Hong Kong, Taipei, Shenzhen, Singapore, Kuala Lumpur, and Bangalore.
Like every trip I've ever made, I'll be returning with a crystal clear picture of the investment climate and a short list of the very best opportunities in the world. So stay tuned!
Best wishes,
By Tony Sagami
P.S. If you'd like my favorite ways to play Asia's booming markets, subscribe to my Asia Stock Alert service. Just click here!
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