China growth story firmly in place
Alpha has long been bullish on China, but cautioned investors about investing directly in its stock market despite the impressive economic backdrop. At the start of 2008, we warned China A shares were in a bubble and simply too speculative to invest in directly.
Our caution was warranted as the chart below shows:
This conundrum of a strong economy but a speculative stock market was the reason Alpha launched POWER Shares – Asian Lions, which invests in a basket of blue-chip companies leveraged to Asian countries benefitting from strong Chinese growth.
To learn more about POWER Shares – Asian Lions, click here
Although expectations are rising that China will experience a post Olympics slowdown, Alpha’s view is Chinese economic growth should re-accelerate later this year – good news for Australian miners and our stock market generally.
Alpha’s bullish view was recently confirmed by the OECD’s latest report on emerging economies – the OECE +6 Leading Indicator. The OECD said: “The latest data for OECD non-member countries tentatively point to expansion in China.”
The OECD data also gives credence to the view that growth in China will enable its economy to “decouple” from falling economic growth in western economies.
The two OECD charts below are an aggregate time series showing a leading relationship of key macro-economic indicators (about six months ahead) with the growth cycles of key macro-economic indicators. They show an expected downturn in western economies and upturn in China.
So while the economic outlook for China remains firm, equity valuations have improved dramatically due to the global sell-off this year.
The table below from Lion Capital shows stock market valuations across Asia. Equities in many high-growth Asian countries are trading on historically low forward average price-earnings multiples. Korea, for example, is on a forward PE of 9.7 times 2008/09 earnings. China is on 11.9 times and Taiwan 11.3 times.
Value has rarely been better, but Alpha still believes investing directly in China is too speculative and that a portfolio approach with capital protection is the smart way to go.
