We continue the multi currency review in this message looking at Jyske Bank’s multi currency strategic review of the biggest emerging market, China. Jyske says:
Seen in the light of a major slowdown in economic growth, Chinese exports will come under heavy fire in the coming months. Given a weaker export sector, and presumably also weaker investments in the private sector as well as slower activity in domestic property-related activities, we anticipate a moderate slowdown in economic growth. By Chinese standards, moderate still means economic growth above 8%, and for the rest of the year, the growth rate will presumably be around 9%, i.e. a growth rate just below 10% for 2008.
International investors have been concerned that the Chinese government would react too slowly to growth risks and that this would send up the risk of a serious setback (i.e. GDP growth rates much lower than 8%). Such fear seems to be out of place, based on the demand figures for July. Foreign trade, retail trade and fixed investments beat expectations although industrial activity is gearing down marginally.
The Chinese authorities have traditionally introduced macro-economic policies supporting economic growth, including an expansionary fiscal policy, monetary-policy easing etc. to avoid a hard landing. We also expect that this will happen this time if growth seems to be too slow. The authorities have recently raised the tax benefit on exports and eased up the tight management of corporate loans in the financial sector.
On the domestic front, the trend in consumer demand is still impressive: July’s 23.3% growth in retail sales was higher than expected. This happened although consumers are squeezed by higher food prices, the solid correction in the Chinese equity market and a slowdown in the real-estate market (although the impact from the two last-mentioned factors was reflected in lower sales figures for cars, furniture and building materials).
With prospects of a moderate slowdown in industrial activity in the coming quarters, the growth in Chinese demand for many important commodities will presumably slow down. Recent data indicate that this trend has already set in: for instance crude-oil imports dropped back by 2.1% m/m in July and by 8.7% in June whereas iron ore imports dropped by 4.2% and 3.5% in these two months.
This suggests that investors are more worried about China than they should be. Chinese growth looks dimmed, but by most financial measures even this dimmer light is bright compared to economics in most countries. The fundamental economic fact is that China is the most populated nation on earth racing into middle class capitalism.
Equity investors may have over reacted and oversold the Chinese market.
In August, the LA Times wrote:
SHANGHAI — Many Chinese investors had hoped the Olympics would give a boost to their nation’s sagging stock market. So far, just the opposite has happened. The benchmark Shanghai composite index tumbled 5.3% on Monday, falling for the sixth time in seven trading sessions. The index has plunged 15% since the Beijing Games opened Aug. 8, and it now stands at 2,320 — down 56% since the start of the year, making it one of the worst performers in the world.
Since then the market has not rallied.
The Guardian wrote yesterday (Sept. 8, 2008): The main Shanghai index <.SSEC> shed 2 percent on Monday, touching a fresh 20-month low, despite a rally elsewhere in Asia triggered by the takeover of the two firms.
The U.S. Treasury’s takeover of Fannie Mae and Freddie Mac is good news in the short term for China, the biggest holder of the giant mortgage lenders’ debt, but Beijing’s huge U.S. exposure still poses a serious risk, a prominent government researcher said on Monday.
The Shanghai stock market is down 67% in less than a year. Yet as Jyske noted above, foreign trade, retail trade and fixed investments are beating expectations.
This is the type of multi currency distortion we look for as value investors.
This does not mean we should jump headlong into Chinese shares.
China according to the analysis of Michael Keppler remains one of the low value markets. Keppler’s sell candidates are China , Egypt , India , Indonesia, Jordan, Morocco.
Market timing rarely works. Value investing is far more effective and based on value alone, it apears to be too soon to jump in the Chinese market in a broad way.
However we can start reviewing Chinese opportunities looking for specific values.
One share to check is Hyflux Water. Hyflux is a Singapote company that provides water services in China. Keppler ranks Singapore as a low value major market along with Austria , Canada, Denmark, Hong Kong, Singapore, Switzerland and the U.S.A, but Hyflux may offer good value now.
We invested $51,000 in our Model Green Portfolio last November. This investment has dropped to $40,193.
We are reviewing Hyflux now in our Multi Currency Portfolio Course.
Join me and Thomas Fischer from Jyske Global Asset Management in North Carolina to learn more about economic trends.
We’ll have lunch at the farm and enjoy the leaf change.
Thomas Fisher speaking to our delegates at the farm.
Delegates enjoying a private conversation with Thomas Fischer during a coffee break at the farm.
This is the most beautiful time of the year on the Blue Ridge.