Wednesday, January 29, 2014

China fear overblown?.........Part 1

The Chinese stock market is one of the cheapest in the world. H Shares listed in HKEX sold for 8X PE with dividend yield well over 3%. Their big cap banking stocks such as ICBC, CCB, ABC or BOC. Frighten with too many Cs???(death in chinese) but sold around 5 times PE I say beh C(cannot die one). Looking at just valuation metrics, all of them are just way below the historical levels.

What prevented me from buying very aggressively are contagion risk and sympathy selling if the US markets were to contract severely i.e. more than 30% drop. The second reason is further selling off in emerging market assets due to on going tapering activities and expected widely to be winding down completely sometime this year.

The emerging markets have attempted to recover their  lost grounds for a few times in the last 2 - 3 years  due to cheap valuations but ever since the Fed signaled their tapering intentions in May 2013, they just put a lid on their advances. See EEM etf which is a proxy to emerging markets. Despite of all the noises in the background(Indonesian Rupiah, Indian Rupee, Turkish Lira, Argentine Peso depreciation), from a technical stand point, they seems to be traded within quite a wide band of trading zone. The bankers in these countries seem to react sensibly by raising interest to stem further depreciation.........This at least getting to a tradeable support.

Coming back to China. The Shanghai Stock Exchange index is at the multi-year low after the bubble burst in 2008. The market is selling very cheap around 7 - 8 time PE since 2012. These kind of pessimism will essentially will come to a pass. From my personal interpretation, the SSE market has a double bottom and last week brief pulled back below 2000 scared off a lot of people. However, it bounced off sharply shows the eager buyers are still there.

The most ideal situation to deploy cash aggressively is to observe how these markets react when the US markets correct violently 20-30%.  I figure since the unwinding of "risky assets" has been on going for the last 8 - 9 months, we might be reaching or approaching to the tail end. If the reverse was to happen, despite of sharp correction of US markets, the Chinese market might continue to advance then I might miss out a lot gains. Since the Shanghai Stock Exchange market actions have been very encouraging and that was the reasons why I decided to put some small sum of money to work. When the stock market begin to go up despite of bad news, those are the good signs. I might continue to put cash to work regularly but will still will keep large sum of cash to average down in case of "sympathy selling" scenario comes true.

1 comment:

dukuhead said...

HAPPY CHINESE NEW YEAR to you and your family, Turtle :)