China Fears Make the Bargains Sweeter

07/06/2011 7:30 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

For all the talk of China overheating, the markets are undervalued, and the risks China poses are far less important than its opportunities, writes James Trippon of China Stock Digest.

Chinese stocks have become very cheap, and it’s just a matter of time until they enjoy another turnaround.

ADRs traded in the US were flying high until they were hit by the six-week downturn, which sank every sector of the market. Fundamentals just don’t make much difference in supporting stock prices during a market-wide downturn like the one we experienced in May and June.

Consider, for example, China Mobile (CHL). As China’s largest telecom carrier, China Mobile generates an excellent dividend yield of 4.34%. The company has a market cap of almost $180 billion, and a very cheap P/E multiple of 9.82.

With hundreds of millions of subscribers—and the numbers rising daily—China Mobile is actually getting cheaper as its business grows. Remarkably, it is currently trading near its 52-week low.

As Jim O’Neill, chairman of Goldman Sachs Asset Management, said in St. Petersburg recent­ly, investor fears about China and the other BRIC countries are overblown. It was O’Neill who invented the term BRIC to represent the fast-growing economies of the world’s new emerging powers: Brazil, Russia, India and China.

Speaking to Reuters, O’Neill advised investors, “For those who have a little bit of foresight, it gives them the chance to get in at sensible levels.”

The turnaround in China will come when it is clear that the government is through with its policy of raising interest rates, and when there are clear signs that the inflationary trends will reverse.

Western stock markets face entirely different pressures, related to chronically slow economic growth and unsustainable debt levels. Until debt issues in Europe and the US are resolved, they will continue to be a specter that shadows the West's stock markets.

So, yes, China’s economic growth is slowing down. That’s exactly what Beijing wants as it struggles with inflation. But growth will continue in the 8% to 9% range for the re­mainder of 2011, according to almost every available source.

In short, China continues to expand economically, and will eventually become the world’s larg­est economy. China is not without problems, but what country is?

Beijing is achieving its goal of becoming less reliant on exports and growing through internal consumption. China has a habit of underestimating its future growth.

Critics say China exaggerates its eco­nomic performance. That’s not true. Over many years, China has had to look back and revise its growth reports upwards due to previously unseen economic expansion.

So don’t let the word slowdown scare you. China needs to cool its economy down. That may mean more interest-rate increases, a tool which puts pressure on stock markets. But Beijing can’t raise rates much higher without attracting a flood of so-called “hot-money” from other countries into the mainland.

Beijing’s mandarins acknowledge that they face a tough balancing act as they face the remain­der of the year. But even the gloomiest pundits don’t see China suffering a “hard landing” anytime this year.

Once China signals that it has finished raising rates, we can expect stocks to rise from historically cheap valuations.

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