Dear Fellow Investor,
The volatility in the stock market this year has been unbelievable. And even after months and months of it, each dramatic downturn still makes my stomach churn.
The violent moves in the stock market were caused by sharp corrections in solid trends, like commodities, the U.S. dollar strength, and especially emerging markets. When these trends reversed their strong upward momentum, many investors were caught off guard. And as a result, the markets -- domestic and global -- tumbled.
This has been a difficult period for investors, as we've watched many Chinese stocks double and triple in value, only to come crashing down in recent months. So I'm sure you are wondering, "What exactly happened to make the markets turn so suddenly?" and maybe more importantly, "Where do we go from here?" I discussed these concerns with my China Strategy subscribers last week, and I would like to share my thoughts with you, as well.
What Caused the Chinese Markets to Turn?
To understand how Chinese stocks got to the point they are today, we must look back to earlier this year. Up until about January, investing in emerging markets had been all the rage. Investors all over the world poured their money into blooming countries like China to profit from their economic growth. And as the U.S. stock market significantly underperformed various emerging stock markets, many investors seeking higher profits turned to emerging market investing.
This strategy worked for a while, as the emerging stock markets performed impressively in recent years. In fact, the Chinese stock market gained about 200% from January 2007 to October 2007. No wonder investors flocked to these stocks!
But in October 2007, Chinese stocks reached a peak and started to correct. Ever since then, the Shanghai Composite Index -- an index of Chinese stocks listed in Mainland China has traded sharply downward. It is currently down 60% since January, as it has given back last year's 90% gain and then some.
After such a promising run for Chinese stocks, this turn of events shocked many investors. So in January, many panicked, took their money, and ran -- they threw all of their emerging market stocks out of the window. Because of this, the Chinese market sell-off spread to other non-commodity based stock markets, bringing down most major stock markets, including emerging Asian markets.
This sell-off has continued all year. And making matters worse is the volatile effects of the proliferation of hedge funds, proprietary trading operations and other aggressive investment vehicles. We saw this earlier this week, as the liquidation of Lehman Brothers and the fear of AIG's demise caused markets around the globe to fall.
As you can see, these problems are all intertwined, and they just fed on themselves, making the whole situation spiral farther downward. Now that we are in this situation, some investors feel like the light at the tunnel looks pretty dim. But I think it may be brighter than they think.
Where Do We Go From Here?
Watching so many other investors panic and withdraw their emerging market investments, you've probably considered avoiding those markets, including China's, too.
But I want to remind you that despite the 35% sell-off in Chinese stocks, the long-term fundamental picture changed very little. China is still the world's fastest growing major economy, growing at 10% this year. And non-export, blue chip Chinese companies continue to grow earnings at 20%.
In addition, indiscriminate selling by mutual funds, hedge funds and investment banks are creating attractive valuation opportunities in Chinese stocks for long-term investors. Notoriously overpriced Chinese domestic A-Share stocks in Shanghai are now trading at its cheapest level ever -- 14.4 times 2008 estimated earnings, down from 50 times last October and cheaper than S&P 500 stocks. So at these record-low levels, Chinese stocks are ready for a run-up.
In addition, I believe the Chinese economy is strong enough to continue growing during this global economic slowdown. I think this is especially the case because Beijing policy makers have shifted their focus from battling inflation to more to stimulating the economy. Earlier this week, China cut lending rate by 27 basis points to 7.2% and lowered bank reserve requirement for mid-sized and small banks by 1% to 16.5%, reversing a tightening policy that started in July of 2006.
Because of these factors, I am optimistic about Chinese stocks. I expect them to be the first to have a meaningful recovery and actually lead other emerging markets to an uptrend as well.
Keep in mind that this won't happen over night. But our focus here at China Strategy is investing in Chinese stocks for the long-term. I firmly believe that the stocks in our portfolio are well-positioned to be amongst the first to bounce back when Chinese stocks recover. Time is of the essence right now, as we have seen incredible market reversals happen in the blink of an eye. As a valued Inside China Dispatch reader, I want to tell you about three stocks that you must buy now, while they are still bargains:
- Bargain Stock #1: As my newest addition to the China Strategy portfolio, this company has a lot of promise. It is China's leader in the security and surveillance sector, and it is profiting from the Chinese government's requirement of security technology in public places, as well as increased demand for surveillance systems in private businesses. This company is perfectly positioned to profit -- learn more now.
- Bargain Stock #2: This company has survived the Chinese stock market turmoil with impressive strength. The company is a leading insurance provider in China, and as the Chinese stock market firms up, I expect its shares to improve as well. Learn more.
- Bargain Stock #3: This company is the number-one medical device manufacturer in China, and because it operates in a booming market, it consistently delivers strong earnings growth. As China's middle class grows, so does the demand for high-quality medical care, and this company is a top beneficiary of this trend. My China Strategy subscribers are already sitting on 115% gains, and there's more to come. Learn more.
Let me help you navigate through these turbulent times, and point out the best ways to profit right now. To learn more about my top three China stocks, and the most promising companies that stand to greatly benefit from the coming rebound, join China Strategy today!
Robert Hsu
