Thursday, October 30th, 2014

Growing Chorus Calls China Stocks a Bargain

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“….the time to buy Chinese stocks is now, ” says Black Rock Inc.

Why China’s Property Bulge is Nothing Like the US Mortgage Implosion

Issuing dire warnings about China’s economy and stock markets became a bit of a fad in financial media last month. Getting the most ink was Dr. Doom, Marc Faber, publisher of the Gloom Boom and Doom newsletter. Faber made headlines by saying China may “crash” in the next nine to twelve months.

About: Dr. Doom, Marc Faber, Gloom Boom and Doom Newsletter, Shanghai World Expo, Bloomberg, China Stock Digest, Shanghai Stock Exchange, Chinese stocks, European debt crisis, BlackRock Inc., Morgan Stanley, Franklin Templeton, CLSA Asia Pacific Markets,
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Amazingly, Faber cited the opening of the Shanghai World Expo as one bad omen. In a Bloomberg interview, he cited a property bust and depression that followed the 1873 World Exhibition in Vienna as evidence of China’s weakness. Some argument.

But, as I note in the June issue of the China Stock Digest, there is a growing chorus of voices among respected trading houses saying Chinese stocks have become undervalued. This holds true on the Shanghai Stock Exchange which has been one of the world’s worst performers this year, and on less volatile markets in Hong Kong and New York.

Chinese stocks traded abroad came under pressure this year as investors’ risk aversion rose right along with worldwide volatility and instability. The European debt crisis and the “flash crash” have amplified investors’ fears and driven many to perceived safe havens in Treasuries, cash and gold. The result is a deep discount in the valuations of Chinese stocks in Shanghai and on foreign markets.

Why China’s Property Bulge is Nothing Like the US Mortgage Implosion

A new voice has been added to the chorus of high-profile voices calling Chinese stocks a “buy” at today’s prices. After the latest issue of the Digest went out, BlackRock Inc., a global asset management firm, told Reuters that the time to buy Chinese stocks is now. Calling China’s equities “cheap”, the manager of the BlackRock China Fund said that there is now a “good opportunity to invest in the country, due to low valuations and strong consumption.” BlackRock says China’s burgeoning middle-class, 300 million strong, is driving substantial internal growth in the mainland economy.

Although there has been ongoing chatter about a real estate bubble in China, Chinese mortgage loans are far better collateralized than those in the U.S. and Beijing continues to take steps to put the brakes on speculation and increase reserves in the banking system.

Among the other voices that have joined the chorus calling China a bargain are:

  • Morgan Stanley which recently declared that Chinese stocks are “mis-priced.” The brokerage says that Chinese stocks are “undervalued” and, “the market is likely to re-rate from the current cheap valuations.”
  • Franklin Templeton says the market has reached a bottom for this year and is poised for a rebound.
  • CLSA Asia Pacific Markets, says it will be time to buy in the second half of the year.

CLSA reflects our own belief that Chinese stocks are being affected by exaggerated fears over the government’s slow withdrawal of fiscal stimulus and its clampdown on property speculation.

Why China’s Property Bulge is Nothing Like the US Mortgage Implosion

But surveying the P/E valuations, PEG ratios and profit margins of China’s cash-rich and profitable companies, there can be little question about the widespread undervaluation of Chinese stocks relative to their corporate performance. At the China Stock Digest we have gone heavily to cash as we await buying opportunities in a turnaround that we and many other investors now see on the horizon.

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PS: As if we needed proof that the financial media can be a poor guide for investors, check out the most recent column by Sy Harding at Forbes.

http://blogs.forbes.com/greatspeculations/2010/05/29/china-the-next-illwind/

On the same day that BlackRock went public with its call for a turnaround in China, Harding wrote that BlackRock had become a “seller” of Chinese stocks. He warns investors away, claiming that BlackRock “believes China’s economic growth has peaked.” Sorry Forbes, that’s no longer true, timely or accurate.

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