China–After the Olympics

08/21/2008 12:00 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

Jim Trippon, editor of the China Stock Digest, remains bullish on China, but cautions on picking the right sectors.

Q. Jim, with the Chinese stocks giving back a large part of their gains, many investors are a little gun-shy about investing in China today. Yet, in your newsletter, you remain bullish. Would you share the top three reasons for your positive view of China?

A. First, we went to cash last fall when the Chinese market began pulling back. That put us in the enviable position of holding onto our gains. Therefore, the impact of the Chinese pullback has had a much more limited impact on my subscribers than on those investors who just jumped on the China bandwagon without dynamically reviewing the Chinese market.

Second, China stock valuations are now at levels below those of 2005. Many China stocks we follow are trading at PE ratios below ten, and that's with growing earnings. Remember, China, unlike the US, is not in recession. The prices I am seeing now make it look to me like we will have a double-digit repeat of our performance last year.

Third, we have the Olympic effect. In the last six Olympic Games, there was an average 19.12% increase in the hosting countries' stock indexes in the six months following the games. In the 12 months after the Olympics, the stock indexes had a strong 26.14% average increase. Given the pullback from China's highs last year, we fully expect history to repeat.

Q. Inflation is becoming a concern in many emerging markets now. What steps do you think the Chinese government will take to keep it low and will that be good for investors?

A. The government in China is attempting to reign in inflation with price controls. Personally I don't think it will work (we tried the same thing here in the US during the 1970's). Investors need to be particularly cautious in the China energy sector which is bearing the brunt of these policies. I don't think price controls are good for investors.

Q. You have written about the potential in China's technology sector, particularly in Internet (e-commerce and advertising) as well as broadband developments. Which one of these sectors (or any other) is your hands-down favorite for near- and long-term growth?

A. We are strong on both of these sectors particularly because they are not subject to the price controls the Chinese government is using to control inflation. We also like the banking sector but that is tougher for US based investors to invest in because most Chinese banks trade in Hong Kong not in New York.

Q. Infrastructure was a sector that did very well in recent years. Do you think its time is over for now? And why or why not?

A. I think in the short haul infrastructure investment will slow after the Olympics. Long-term, it is still a major opportunity. Therefore I would not overweight infrastructure in an active trading portfolio.

Q. Would you give our readers a couple of your favorite stocks right now?

A. We like Melco (NASDAQ: MPEL) and E-House Realty (NYSE: EJ). Melco is a gaming stock in Macau which is the Las Vegas of China. It trades at a valuation about 1/3 of what similar gaming stocks in the US trade for. E-House is the largest real estate broker in China and is actually a beneficiary of their inflation. Inflation in real estate prices result in higher commissions to the broker.

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