Stock markets are struggling around the world, driven largely by the economic slowing and credit concerns. Yet, while GDP growth is negative in the Un...
Stock markets are struggling around the world,
driven largely by the economic slowing and credit concerns. Yet, while GDP growth is negative in the United States, there are major markets that are continuing to report strong growth.
China continues to be a major area for investing in my view, in spite of declines in its GDP forecast going forward. Yet what happens in the U.S. will impact the economy in China, which has seen its GDP projections steadily decline, as the global demand for Chinese goods and services plummets. The People's Bank of China (PBOC) has been cutting the country's key interest rate, but it has yet to provide any signs of improvement. There will need to be more fiscal stimulus from the Chinese government to get the massive economy rolling. But this is where China has an advantage over Western economies.
In China, there is only one government in control with little interference. That is what you get under a Communist government and, in these dire times, it may be the best thing for the country. We know the government wants to drive up spending and has already pledged trillions of dollars for infrastructure spending and other economic stimulus programs. We expect to see the positive impact of this going forward. Yet, for a more sustainable recovery, global economies including the key U.S. market will need to strengthen.
Chinese stocks have been struggling in a nasty bear market, but the benchmark Shanghai Composite Index (SCI) has held in a sideways trading range since early November. The SCI needs a bottom to give some confidence to investors, but we are not sure if a solid bottom is in place. While Chinese stocks continue to trade with a negative bias, I see some tremendous bargains in Chinese stocks, which are trading at valuations much cheaper than U.S. stocks.
In a recent episode of CNBC's Mad Money, Jim Cramer expressed his preference for Chinese stocks. This is bullish, as Cramer had been negative on Chinese stocks in the past. He mentioned buying the iShares FTSE/Xinhua China 25 Index (NYSE/FXI), an index comprised of 25 of the most liquid and largest companies in China.
The fact is that China is the world's third largest economy after the United States and Japan, according to Chinese government officials. The country's GDP estimate for 2008 and 2009 has been steadily falling, but remains in the eight-percent area depending on the length and severity of the global slowdown, which is incredible compared to other world economies. Investment bank Goldman Sachs predicts that China will become the largest economy by 2040.
China has also been aggressively cutting its interest rates to try to jumpstart the economy and get consumers to spend.
Similar to the U.S. but at a more rapid pace, China is spending on its infrastructure, which we believe will be a massive growth area for the country over the next decade. Already in the plans are $710 billion for the country's rail system by 2010. The country will also spend $40.0 billion over the next two years on its new third-generational (3G) mobile communications networks, according to the Ministry of Industry and Information Technology.
If you hold Chinese stocks listed on U.S. or Canadian exchanges, it continues to be difficult times. I continue to be utterly surprised at the degree of the selling action and believe it has to do more with speculators dumping stocks. And even if you factor in the slowing in China's GDP, the current valuations remain intriguing and the country remains a growth market for many sectors.
The reality is that, while I continue to like China longer-term; the short-term outlook remains cloudy and filled with uncertainty. You may be accumulating Chinese stocks that have fallen significantly, but you should also be careful not to chase stocks lower since, without a bottom, it is a risky strategy.
Profit Confidential
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