Dear Fellow Investor,
The 2008 Beijing Summer Olympics officially kick off tomorrow, August 8, at 8:08 p.m. A tribute to the Chinese belief in the lucky number 8. But how lucky will the Olympics be for China?
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Now that's a question that I am asked a lot. Most investors are particularly interested in how Chinese stocks are going to react after the curtain closes on the Olympics. Well, I'm actually fairly optimistic about the Chinese stock market's performance in the weeks following the Games. Mainly because the Olympics are going to be China's coming out party -- it's going to showcase the country's incredible economic progress to the world.
Plus, China has history on its side. If you take a look back at some of the recent Olympics, you can see that the Games provided a nice boost to the host cities' stock market performance in the years following the Olympics. Take Athens, for example: One year after the Summer Games, Athens' stock market moved 41% higher, and four years later the stock market was up 112%.
And I expect the Beijing Olympics to positively affect China's stock market's performance in the weeks, months and years following the Games, too. That's because China has more than just the "bullish Olympics effect" playing in its favor. It also has strong economic growth, a government focused on curbing inflation and stocks trading at attractive valuations.
In Line for a Bounce
First, if you've been reading your Inside China Dispatch, then you know that China has been enjoying years of strong economic growth. In 2007, China's economic growth clocked in at 11.4%, and I'm expecting double-digit growth again this year -- probably around 10%.
While this is down slightly from last year's rate, it's still above China's average annual economic growth rate of 9.5% of the past two decades. This year's economic growth is going to be driven by rising domestic consumption, which is up 20% from last year. And as a result of the Olympic Games, consumer spending is expected to grow even more in 2008. With the Olympics being a huge platform for advertisers and sponsors, the flurry of marketing will likely further boost domestic consumption in China after the Olympics.
Second, for the past year, China has been subject to record-high inflation rates. In April China's inflation peaked at 8.5%, but it has slowly been declining ever since -- May's rate was 7.7%, while June's was 7.1%. The Chinese government has made it one of their top priorities to curb this high rate by raising interest rates six times last year and hiking bank reserve requirements five times in 2008. And, as you can see, these actions are paying off.
And finally, the Chinese stock market is trading at extremely oversold levels. Year to date, the Shanghai stock exchange is down 47%, while the Hong Kong Hang Seng index has dropped 18%. With the sharp correction that Mainland Chinese stocks and Hong Kong-listed companies have experienced this year, most of the speculative excess has been eliminated, and Chinese stocks are trading at attractive valuations again.
These three factors combined with the "bullish Olympic effect" are lining Chinese stocks up for a nice bounce in the coming weeks and months. I told my China Strategy subscribers back in early July to start preparing for rally I'm expecting in China stocks in the weeks surrounding the Olympics. Looking back, that was a good decision–Hong Kong-traded stocks have moved 5% higher in the past month.
How to Profit from the "Bullish Olympic Effect"
The best way to profit from the Olympics rally in the long term–the weeks, months and years following the Summer Games -- is to focus on solid companies that are benefiting from China's continued economic strength. And I advised my China Strategy subscribers to load up on three such companies, and we've been reaping the rewards ever since.
My top three long-term bets for post-Olympic growth include China's leading education services company, China's top medical devices manufacturer and China's main wireless service provider. All three companies have moved higher since I banged on the table in early July -- up 9%, 9% and 2% respectively.
And that's just a drop in the bucket of profits I'm expecting in the upcoming weeks, months and years following the conclusion of the Beijing Olympics. To find out how you too can profit from China's "bullish Olympic effect," join China Strategy today!
Robert Hsu
