Tuesday, January 20, 2009

China Calling


China markets have been trying to wrangle itself away from the market weakness in the US and Europe. So far, we have seen the buyers winning the battle over the last week or so, albeit marginally so far. More institutional and private funds have funneled into China funds, and a deliberate move by Beijing to try to reignite some positive activity in the Chinese markets have pushed the markets there forward.

There are good reasons to start ,oading up on some H-shares in HK and a riskier bet would be some of the locally listed China-covered warrants.

  1. The “smart money” is buying, not selling. Many foreign banks (including Li Ka Shing) have been selling down their Chinese banking shares in droves - the activity has been substantive over the last few weeks. We have to recognise that the foreign banks are selling because they are in trouble, not because the Chinese banks are in trouble. Secondly, the Chinese banks are the only kind of assets that can still get a decent price nowadays. Thirdly, the Chinese banks are the only kind of assets that there are plenty of willing money to buy them even now. Funds investing in emerging-market stocks raised their Chinese holdings to the highest level since 1995.
  2. Chinese shares are very reasonablt valued. If legendary investors like Warren Buffett really like US stocks trading at 12 times earnings, they should be rabid over Chinese stocks. Based on the MSCI China Index, the average Chinese stock trades for less than eight times earnings, and they do not have to contend with the massive de-leveraging.
  3. Oil is much cheaper. One of China’s biggest challenges was to keep a lid on inflation, while still maintaining its breakneck pace of economic growth. That was no easy task with oil at $150 as the cost of shipping, food and fuel were increasing rapidly. Keep in mind, China imports a net 3.3 million barrels of oil a day. Now that oil prices are down considerably, the recently announced stimulus would see a more effective trickle through effect and multiplier effect, and not being "wasted" on oil prices. The risk of inflation in injecting the huge stimulus is muted as well.
  4. The economy is NOT in a recession. Sure, it’s slowing down, but China is still on track for a solid 5%-6% expansion based on analysts’ estimates. And 8% if you believe the government statistics. Regardless of who ends up being right, compared to the contraction in most other economies, such a rate is downright explosive.
  5. The last time Chinese stocks were this cheap was during the Asian financial crisis. Back then, most Asian countries were running huge deficits. But this time the roles are reversed. As of December, China boasts $1.95 trillion in foreign reserves. And counting. If necessary, the government can deploy these surpluses to keep economic growth humming along.
  6. The consumer is just getting started. The country’s burgeoning middle class, now the size of the entire United States, is just getting started. The McKinsey Quarterly estimates that it will take two decades before these nouveau riche reach their full spending potential. As we know from our own experience and prosperity - 70% of GDP in the United States is attributed to consumer spending - the consumer is an engine of economic growth. In other words, the global recessionary headwinds are no match for the Chinese consumer. Like it or not, the global economy has grown by 70% in trade terms since 2000 till mid 2008. Much of that growth was due to globalisation and a huge new middle class of consumers being created in China, India and Latam - that middle class, while affected by the current crisis, will still be a force to be reckon with.
  7. Locals are optimistic. We know consumer confidence plays a big role in the success of our own economy. It flat out stinks right now in the United States, And the economic conditions reflect it. But in China, it’s an entirely different situation. A recent survey from the Pew Research Center shows that most Chinese (86%) feel positive about where their country is headed. And that’s up from 25% just six years ago.
  8. The “mother of all stimulus plans.” While the Obama stimulus has yet to take hold in the United States, rest assured it will. Same goes for the $584 billion the Chinese government is pumping into its economy. China’s “got the mother of all stimulus plans” when you factor in the government spending, savings rates and the rapid decline in commodities prices.
p/s photos: Amy Fan Yip Mun (aahhh, finally found my dream girl, to me she was the best looking starlet from the 80s and 90s in HK)

8 comments:

Gamelion said...

Wow , it seem a lot of hardcore Keynesian fans out there !!

invest said...

the news about RBS perhaps provides some indications as to why it has been aggressively selling down its stakes in BOC and also HSBC.....

hng said...

Dear Dali
Do you have any investment ideas on Malaysia REITs. Currently, i'm holding most of REITS listed in Bursa, namely AXREITS, UOAREITs, Atrium, Hektar, AmmanhRaya and TowerREITs. Which category of properties are least affected or less vulnerable in the weakenning economy?

Salvatore_Dali said...

hng,

obviously you wee going for the yield which is pretty hot... and will be attractive unless office occupancy falls to 60%... if not, yr yield should remain solid... but the concern is the share price which is not reflective of NTA as ppl expect capital values to be lowered by at least 10%020%... plus no transactions or sales means NTA also meaningless...

I would only keep AXIS and UOA... can dump the rest...

hng said...

Thank you Dali. If the NTA is not reflective to their real or present properties value, why most of REITs still enjoy higher asset value after conduct revalution by indepdendent valuer!?

Salvatore_Dali said...

hng,

its a numbers game... NTA is only applicable if they can dispose all properties now at the so called valued prices... chances are they may be able to... maybe a 5% or even 10% discount to NTA... mkt conditions now, no one is willing to buy assets of any kind... closed end funds like REITs always suffer discounts to NTA, thats a fact, I dont think there is even 1% of closed end funds that trade close to NTA, even stock funds, which are more liquid... thus REITs will move big only when there is a rich buyer (e.g. YTL) wanting to add to their portfolio a range of properties, thus making a G.O. at NTA...

easystar said...

China is an interesting one. Much like at the end of the 1870-90 crisis, US replaced UK as the world largest economy, this could be China exceptional opportunity to become the world leader much quicker than previously thought.

However, true to China style, there will be lots of human cost in this process (which the Wests are not willing to pay), e.g. China's end in subdisidy to force SME to go into higher value activities etc. There will be countless people who can't compete/upgrade who will suffer greatly. But in the end, China will emerge stronger while the all-too-much rights Western societies will become relatively poorer.

david said...

Hi Dali,
You may not like what I say.......
You are getting a bit rusty I have to say. Most of your call lately is slightly inaccurate, a bit like icapital. But at least you are not as arrogant as Tan Teng Boo nor as proud. You are still the fun-loving Dali.

I hope you have not invest too much in China. China has good potential, but please invest in china stocks that listed in HK, Spore and US, more transparents. Just a bit of advice.