Saturday, August 3, 2013

Stock Market: China - A Hidden Treasure?

(Drivebycuriosity) - Stock Markets all over the world are rising and are reaching new all-time highs. But there is one major market that missed the global rally: China.

The Shanghai Composite Index, which represents the Chinese stock market, lost around 11% year to date and around 5% in the recent 12 months (google). According to Bloomberg this index has tumbled 43% since its temporary peak in 2009 (bloomberg).

China stocks have been suffering from a gloomy sentiment.  "Bets on declines in the largest Chinese exchange-traded fund are surging to the highest level since 2007", wrote Bloomberg last April (bloomberg). It looks like that sentiment hasn´t improved yet.

Public opinion is heavily influenced by notorious China bears such as Jim Chanos, a hedge fund manager and notorious short seller, and recently New York Times correspondent Paul Krugman (nytimes  drivebycuriosity). They all have been banging the "China Crash" drum. The China haters, including many hedge funds and other speculators, are betting on a so called "hard landing" of the Chinese economy.

The fundamentals say otherwise. In the recent 10 years, China´s growth rates have´t fallen below 7.5% (the growth rate in the second quarter of 2013), in spite of the notorious "China Crash" calls. It looks like China`s growth is accelerating again, at least a bit. This week we got news that China`s manufacturing and service sectors both are gaining speed again (bloomberg). Bloomberg also writes, that "industries including leisure, e-commerce and transport are becoming a bigger part of the economy, supporting the government’s efforts to shift the focus of growth away from investment and exports".

I believe in China and in its stock market. The growth story stays intact, thanks to the secular catching-up process which is fueled by the still extreme income & wealth differences to the US and other Western nation values. The Chinese government already started reforms to encourage economic growth and stimulate consumer spending. The faster growth of the service sector is an early sign that this strategy is working.

Beijing also implemented a huge infrastructure program, including ample investments in railway systems and highways, to support the economic growth. And the Chinese monetary policy becomes more accommodating because the risks of inflation are constrained - at least for now.  

Hence I reckon that China´s stock market is a hidden treasure after the multi-year fall. The value of China´s stocks is buried under a heap of rubble like negative rumors and scare mongering. This situation reminds me of spring 2009 as global panic drove the U.S. stock market into a ridiculous deep hole. Since then the U.S. stock market has been rallying and gained 150%, rewarding all who stayed confident.

I believe the Chinese stock market is ripe for a recovery rally. There is even a chance that China might repeat its temporary rally from 2009. According to Bloomberg, the Shanghai Composite Index then doubled in 10 months through August 2009 (bloomberg). Anyway, China´s long term growth perspective should reward any patient investor amply.

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