Throughout the last month we have been suggesting that there is a cracking opportunity to invest in Chinese stocks, given the serious undervaluation on almost every measure and certainly relative to developed markets like the US & Northern Europe aswell as other emerging markets. The last signal it seems we need is for Anthony Bolton to throw in the towel!!
In the last issue of Spreadbet Magazine (page 44 – http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v9_generic) and in a recent BLOG (http://www.spreadbetmagazine.com/blog/2012/9/25/china-in-cyclical-slowdown-or-hard-landing.html) we set out our stall as to just why we are bullish on China. Interestingly, yesterday Bloomberg reported that sales of Put options on Chinese stocks have now fallen to a six year low (Put options give you the right to sell an index or stock) ahead of the upcoming leadership change on expectations that the new guard will increase stimulus measures. To us that’s a sign you definitely should not ignore that adds weight to a bottom being probed out in the market.
Over the last few years, Chinese stocks have been hit by decreasing GDP growth rate and dissipating government stimulus and central bank easing. Indeed, during the last 4 quarters, China experienced decreasing GDP growth rates of 9.1%, 8.9%, 8.1%, and finally 7.6%. Fixed asset investment, one of the growth engines for the economy, has also decreased from a growth of 25% to 20% and industrial production is rising at a weaker pace.
The Chinese government has been concerned with the housing market and has tried to cool the economy a little to avoid a bubble forming and with growth rates of 8% or 9%, there was no need to give the economy incremental stimulus. The central bank has also been careful to keep a lid on domestic inflation and has very effectively controlled prices with inflation now back at 2%. In short, there is room for the foot to hit the accelerator pedal again.
With regards to the replacement of the Chinese leaders, as we also referred to in our magazine article, these new officials will try to implement their own infrastructure projects as soon as possible to allow enough time for them to be developed while they are in governmental positions. This is the main reason why put options are at a six year low in our opinion. Investors believe a new investment cycle in China is ready to be started. One, not to be missed in our opinion.