Buy the dip no longer sounds sufficient to calm fears, nor will forward guidance. Jerome Powell will...
No Crisis in China or Asia
09/29/2008 12:00 am EST
Yiannis Mostrous, editor of Silk Road Investor, says China is growing strongly, and Asia's valuations are as cheap as they've ever been.
The [recent] announcement by the People's Bank of China that commercial banks' benchmark lending rate would be cut by 27 basis points as of September 16th while deposit rates would remain unchanged is the first step toward a much easier monetary policy.
Inflation, much feared at the beginning of 2008, is now falling: the latest numbers for the month of August show a 4.9% rate, down from 6.3% in July and 7.8% for the second quarter.
The oil-led commodities correction also allows the government room to implement its growth policies and to support the economy in this transition phase. Increased spending on infrastructure, rising social expenditures, and more government housing will be part of the solution. [Meanwhile,] fixed-asset investment (FAI) rose 27.4% in August on a year-over-year basis; capital expenditures were $190 billion in that month alone.
China's economy will slow this year, but an 8% to 9% growth rate in an economic environment such as this shouldn't be ignored. And a market as beaten down as China's should also be considered for some cherry-picking.
Infrastructure-related companies will benefit from China's FAI actions. The market has treated such companies brutally, to the point that they represent great values at current levels. Of course, neither valuations nor technical analysis matter much when everything is being sold, but these are the times to start looking for bargains.
Asian markets are still under considerable selling pressure. Investors first sold to book profits, but are now unloading in case there's something very wrong with the region that we don't know about it yet—in other words, the anticipation of contagion. The latest numbers show that more than $14 billion has been redeemed from offshore Asian funds since the beginning of 2008. Compare that to 2007 net inflows of $16.4 billion.
There is the potential that now-unknown problems will emerge, but Asian corporate balance sheets are generally healthy; corporate leverage is at a record low 32.8%, down from 80% ten years ago.
Most technical indicators are stretched to Asian crisis levels, and the region is rapidly approaching absolute trough valuations. The price-to-earnings ratio is down to 10.3x, matching the level seen at the lows of the 1991 global recession and lower than the 1998 crisis and the 2001 recession.
Although this doesn't mean a lot in a market like this, the truth of the matter is that there's no crisis in Asia. The regional economy as a whole is in much better shape to deal with problems than ever before. It's difficult to hold onto long positions in times like these, but maintain your exposure to Asia.
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