Discussion in 'Trading' started by TheCaymanIsland, Dec 1, 2008.
anyone starting to invest in China via an ETF?
China is a great long term buy, but you may want to wait a few months and see how this shakes out:
"We expect the Chinese economy to slow further for another several months before a rebound in mid 2009," wrote Merrill Lynch economists headed by Ting Lu in a note Monday. "It's our view that China's massive fiscal stimulus plan will help buffer the slowdown."
Itâs Going to Get Worse Before It Gets Better
Most of the downturn has already been priced into Chinese shares. The market is down about 70% from its highs of a year and a half ago, but itâs getting worse.
A few hours ago, China released the latest reading of its Purchasing Managers Index. The index, which tracks manufacturing activity, plummeted to 38.8. Thatâs down from a previous low of 44.6 in October. Since a reading below 50 means manufacturing is contracting, Chinaâs manufacturing has contracted for four straight months.
Despite it all, Chinaâs economy still grew at a 9% clip in Q3. Thatâs quickly starting to change. Chinaâs economy, which really needs 6%-7% growth to sustain its âbuilt for growthâ economy, is watching growth decline quickly.
JPMorgan recently stated it expects Chinaâs GDP growth could drop to a 4% annualized rate in the fourth quarter of this year. Thatâs not going to keep Chinaâs still adolescent economy, which requires a lot of capital, growing.
The Bigger Picture
In the latest issue of the Prosperity Dispatch we took a hard look at the structure of Chinaâs economy. We determined:
About 39% of Chinaâs GDP is capital spending. That means a huge portion of Chinaâs economy is building new factories, steel mills, mines, etc.
With the economy slowing down, you really canât justify building a new factory while 10 others are getting shut down. Economies just donât work like that.
Thatâs the bigger risk here. Chinaâs economy is built perfectly for booms, but it will face a lot of trouble as more and more factories get shut down.
By the way, some are arguing that domestic demand will actually see the Chinese through:
But I think that's too optimistic myself. Regardless, there are many great reasons long term to buy China of course:
NEW YORK (MarketWatch) -- In spite of the current market turmoil, there are four reasons investors should be actively looking for opportunities to invest in China for what we expect will be a strong rebound in late 2008 and into 2009.
1. China's economy is not heavily dependent on exports but rather on domestic demand
The common misperception that China's economy depends entirely on a healthy export market has badly hurt the market in recent months. In reality, less than a quarter of economic activity is export-related. While 37% of GDP is identified as "exports" this is offset by inputs which are imported. Correcting for this to try to identify the 'value-added' of the export activity results in the much lower number.
2. GDP growth of 7% - 9% in 2009 versus U.S., Eurozone and Japan
For all the talk of a slowdown in China, the reality that the economy is, in fact, growing gets lost. Yes - China will slow but it will still be one of the only areas worldwide that has some growth. The government there is very motivated to maintain growth of 8% or above to ensure full employment and social harmony.
The government will do anything they need to in order to ensure they reach this goal.
3. China's government has the resources to spend their way through the external slowdown
With substantial foreign reserves, a government surplus of 2% of GDP and limited public and private debt, China is uniquely well positioned to spend its way through a period of slower external growth to ensure continued economic growth. China has done this before, to avoid the worst of the 1998-2000 Asian meltdown.
During this period China's economy grew GDP at an average of 7.9% while many of the Asian economies saw declines in 1998 and were slow to rebound. South East Asia saw 0.2% average annual GDP growth in 1998-2000. We believe China will be successful in spending their way through an external slowdown again.
4. Inflation is down -- providing room to spur growth through spending
As a country seeing rapid development, urbanization and industrialization, China is extremely energy-hungry. Inflation was a major concern there for the first half of 2008 peaking at 8.7% Consumer Price Index (CPI) inflation in February. This was very worrisome for China's population and leaders who feared that sustained high prices would slow or permanently damage their economy. The recent swift decline in oil and food prices has helped this situation dramatically.
Inflation in August was just 4.9% year-over-year and the outlook for 2009 could be for a level of 2% to 3%. This is extremely important to China as it gives them the latitude to spur growth through spending and the ability to deliver on their promise of continued development to their people.
Add to this the fact that stocks are well down from their highs and the companies, individuals and government are not drowning in debt like the developed world and you have a recipe for a dramatic turnaround in stock prices in China and Hong Kong. I would also argue that this prospect of infrastructure spending in China should boost the outlook for industrial raw materials (cement, steel, iron ore ...) and, by extension, Brazil. I think that there is a clear case to be made that the reality in China is much brighter than the headlines and stock indexes would indicate.
David Riedel is the founder and President of Riedel Research Group
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