Friday, March 29, 2024
 
Columnist
Martin Hennecke
Martin Hennecke
Chief economist at The Henley Group mwh@thehenleygroup.com.hk
"A host of doomsayers have continuously claimed that China was Dubai times 1,000 and nothing more than a cheap labor factory for the United States. So it was inevitably destined to rely solely on exports."

Dragon awakes
31/01/2011


A host of doomsayers have continuously claimed that China was Dubai times 1,000 and nothing more than a cheap labor factory for the United States. So it was inevitably destined to rely solely on exports.

But the reality is turning out quite differently. China's economy remains incredibly strong.

The mainland is increasingly turning into an economy and market in its own right.

Trade data released last month shows China's exports reached US$1.58 trillion (HK$12.32 trillion) for last year, up 31 percent from 2009.

Imports jumped considerably higher ¡V 39 percent from 2009, growing to a total US$1.39 trillion. The numbers are a clear reflection of the country's rapidly growing domestic market and consumption power.

More importantly, many analysts seem to have largely ignored the latest projection: China will overtake the United States as the world's largest economy as early as next year ¡V measured in real output/purchasing power parity.

The forecast was made by the Conference Board, a highly respected US-based research association.

The actual size of the Chinese economy generally tends to be vastly underestimated by most market participants.

This is because it is the nominal GDP figures that are mostly being looked at.

Yet, such data do not account for the fact that the prices of identical goods and services in China are considerably lower than those in the United States (or Europe).

So, any reasonable comparison of economic sizes should be concerned more with the volume of actual physical production, as reflected in the purchasing power adjusted GDP numbers, rather than only with the US dollar prices of such items.

So, having established China's economic might, as well as its currency's undervaluation, it seems to be the right choice for investors to at least gain some exposure.

Western countries, burdened with escalating sovereign debt and ever increasing taxes, no longer seem to be the areas with the most growth/upside potential or those which are most reliable and secure.

There are still good value stocks to be found across all different sectors in China. Based on stock-specific bottom-up research, it should be noted that, from a general sector specific point of view, the mainland banks listed on the A-Share market do appear to offer a particularly good risk/return potential trade-off at this moment.

This is because it is a sector that has largely been shunned by investors recently on the back of fears about property/bad loan exposures, as well as fears of lending restrictions and monetary tightening.

Yet these fears may be overdone considering that the recent weakness of bank stocks has reduced them to relatively good value again based on P/E ratios. And bad loans have been easing.

Another reason I like mainland banks is they stand to increasingly profit from the internationalization and liberalization of the yuan in line with corporate and personal transactions in the currency.

Currently, banks listed on the China A-Share market are mostly trading at discounts as compared to the same stocks traded on the H-Share market.

This is unusual, since A-shares mostly tend to trade at a premium ¡V implying an upside catch-up potential of the A-share stocks.

On the downside, one must be aware of specific risks involved in any China investments.

There are certainly bubbles in some areas, and the risk of sudden government intervention is always present.

Recent curbs on the property sector are a good example. The state can also lower or hike various commodity prices as it sees fit.

In the broader sense, no matter what stocks you buy, you have to take into account the seriousness of the sovereign debt crisis in the West, which continues to pose severe risks to all economies and markets around the world.

Therefore, caution should remain the priority when investing.

It is advised to enter positions of relatively high volatility (such as Chinese banks, or any other emerging market equity or commodity sectors, for that matter) only if the invested capital can be spared for the medium to long term.

Any form of leverage or short term speculative gambling is unlikely to bear fruit.

In today's uncertain times, I recommended you to continue to hold some gold and silver.

You should also protect yourself against inflation. That is ¡V avoid overexposure to any one particular asset/asset class even if it appears outstandingly attractive.

Your portfolio must be solidly diversified across a basket of different asset classes, different geographical regions, as well as different investment tools used.
 


Other articles:
Land of the rising debt - 28/07/2014
Hong Kong property - the cheapest in the world? - 12/05/2014
Ukraine-Russia tiff: turning crisis into opportunity - 31/03/2014
Emerging markets mayhem can offer rich pickings - 10/02/2014
Specter of default dogs West as forecasts come true - 18/11/2013
China equities trumpeted for second glance - 21/10/2013
It ain't over till the fat ladies sing - 17/06/2013
Golden time to load up - 04/03/2013
Shale gas unlikely to wipe sheen off Russian shares - 18/02/2013
Games of distraction - 03/12/2012
More Article ...

Other Columnists
 
Login
Password
Register  Forget Password
Advanced Search
© 2024 The Standard, The Standard Newspapers Publishing Ltd.
Home | Business | Metro | Focus | Opinion | Markets | World | Sports | Entertainment | Monday Money | Property | Macau | Weekend