A Bull In China, thats what I am

When I was younger, I had a good friend who told me he wished to marry a Japanese woman and that it would be a dream come true. I never understood the fascination behind it because I did not see why Japanese women would be any different from our very own Singaporean women. But he was adamant that Japanese women were just classy and attractive. We were in secondary school then, imagine that. Like all dreams in our lives, it never came true. That friend of mine went on to marry a Singaporean lady and had 2 kids. On Friday, I went to a pub with a couple of friends and there was a Japanese waitress who sat and chatted with us. Only then did I understand my friend's fascination with Japanese women. She was classy, cool, among many other things. Two out of the four men at the table were charmed and one even claimed that he would stop being a womaniser if he could marry her. Of course he was drunk, no one can quit being a womaniser. I personally thought she was attractive but simply was not my type because I have always been a sucker for older women, however that leaves for another conversation.

Why did I use this story to lead into my post of this week? Well I was reading a good report on Chinese strategy over the past week and it occured to me that the most commonly spoken about market in the investment world is China. Even though it has been so popular, but contrary to what the whole world believed, China turned out as the worst performing Asian market so far in 2010. How wrong could analysts be? No one would have predicted this when 2010 started, with Chinese growth back at double digits and a property market that was red hot, interest rates at a low and inflation a tepid levels. Personally, I have been bullish on China before but I never felt overwhelmed enough to claim that it was the market I should be fully invested in. It is similar to the situation of me not seeing my friend's obsession over Japanese girls. However over the past week, it seems to me that I have reached an epiphany and realised that both the fascination with Japanese girls and China stocks markets are justified.

Over the past decade, the market chatter on China has always been positive. Finding an analyst or strategist that would hang their head out and went negative on the Chinese market was not impossible but harder to find that a Great White Shark. Over my investment career, I have read book after book, report after report on why investors should be invested in China and if they don't they would be missing out on the opportunity of a life time. They were definitely right during 2005-07 when the Shanghai Composite hit close to 6000 points and traded at 40 times forward p/e with price to book at almost 5 times. I remember fondly those days as an investment strategist when the market was so predictable and there would be rallies that lasted more than 10 days in a row. Good times for reminiscing.

In the past 3 years, it has been a different story. The Shanghai composite has since fallen more than 70% from its peak before rebounding to levels 50% lower than its 2007 level. To illustrate how irrational investors are, I remember investors, analysts, strategists etc were all predicting the Shanghai Composite to continue its ridiculous run upwards and that valuations in excess of 50 times p/e was not excessive considering companies were practically growing earnings at more than 20% per year. It was as if the party would never end. But we all know today that it did end and it ended really badly. Fast forward to present day as the Shanghai Composite sits at 2600 odd points, many analysts are predicting a possible hard landing for the Chinese economy with the property market crashing and stimulus spending reeled in by the Central Govt.

What a reversal of fortunes, but the question is...what has changed since 2007? Nothing....Growth is still at double digit levels, inflation is lower now, interest rates are low too, the yuan is stronger, companies have become stronger in terms of balance sheet strength after the financial crisis weeded out the weaker players. Funny thing is, the same analysts and strategists that were bullish in 2007 are claiming that 15 times p/e and 2 times book value makes the Chinese market look excessive. What logic is that???? If we look back at the charts, the valuation for China H and A shares are all looking at very reasonable valuations and with the profitability index for Chinese corporates back to their pre-crisis levels.

If you ask me what are the sectors I am bullish on for the Chinese markets, I would say transportation, oil and gas, financials and utilities. I really do not think its the right time to go for real estate yet. With the exception of the transportation sector, the rest of those which I have pointed out earlier are the sectors that have done badly over the past 8 months. Valuations are looking good and these sectors will be thriving as the Chinese economy continues to power ahead.

To pick specific stocks listed in China is a daunting task and I am not going to venture into any specific picks at this time even though I have a couple of names in my mind. I would encourage everyone to at least gain exposure to Chinese stocks during this period of time because I believe 2H10 and 2011 will be a good year for Chinese stocks. No doubt that there will be volatility but I am sure that it is a good entry point for those looking for chinese exposure.

For me, I have my reservations about the level of corporate governance of the chinese companies that is why I prefer to use exchange traded funds as a vehicle for me to gain exposure. I have listed all the Chinese related ETFs listed on SGX for your reference below. I like to use this because the management fees are minimal due to their passive nature, also you get diversified exposure to the Chinese market and governance issues are not going to be a major risk for investors. Personally, I do not like the larger indices like CSI 300 because the portfolio is too diversified for my liking, I prefer that of Xinhua 25 or SSE 50 which gives me exposure to the prominent big caps and gives me more upside due to its concentrated portfolio. Thats just me so you make your own decision on which to choose.

In one week, I discovered the merits of Japanese girls and Chinese stocks in a way that I have never seen before, so all in all, it was overall a good learning week. for me

List of China related ETFs listed in Singapore

United SSE 50 China ETF

db x-trackers FTSE/Xinhua China 25 ETF

db x-trackers CSI 300 Index ETF

db x-trackers MSCI China TRN Index ETF

Lyxor ETF China Enterprise (HSCEI)

Lyxor ETF Hong Kong (HSI)



Have a great week ahead!

Best,

SVI