Yoshikami: Time to Buy China Equities?
Founder and Chairman of the DWM Investment Committee at Destination Wealth Management.
The Shanghai Composite Index fell 23 percent since the beginning of the year, largely due to concerns over global economic fragility and fears of China’s property market overheating. Given the correction, is it a good time to buy China equities? Well, if you believe in the China growth story, then China is worth looking at now.
Faring Better Than The Rest
China’s macro picture looks markedly healthier now. Most investors view China as a safe haven in light of ongoing financial turmoil in continental Europe, and in comparison, China could be considered one of the few healthy economies in the world today.
We are seeing better visibility and growth prospects outside of Europe, particularly in China. The problems Europe faces will be long lasting and requires political will that eurozone countries don’t necessary have right now.
China does have its own set of problems.
Bubble valuations and a dependence on exports are a concern to be sure. However, Chinese policymakers have shown the commitment needed to deal with these issues.
It was only just a few months ago that the focus was on the prospect of China overheating. These fears are dissipating though a slowdown in growth is clearly occurring. This inevitable given the global economic crisis.
So far this year, China’s policymakers have erred on the side of caution. They have raised the reserve requirement ratio three times, and taken a series of measures to curb speculation and price rises in the property sector. China is taking action to avoid the fate of other struggling economies.
The Recent Purchasing Manager’s Index for China’s manufacturing sector suggests that the economy is cooling and factories are feeling less cost pressure. Chinese exports sectoris also showing continued strength though sales are slowing.
My view is that China’s leadership remains committed to high single-digit growth, and I believe that they have the necessary tools to implement monetary policies and other necessary measures to achieve that goal.
Chinese Betting on Equities Again
There are not a lot of places for the new wealthy Chinese to park their money. There are two places to invest – either in the property sector or in equities.
The government has been working hard to curb spiraling property prices. Efforts are underway to rein in loans for purchases of multiple homes, increase mortgage rates and raise down payment requirements. These moves have made it less attractive and more difficult for people to speculate in the housing sector. This leaves us with equities.
Shanghai price to earnings ratio are now down to 19, versus a cyclical peak of 33 in November 2009, and compared to an average over the last 8 years of 30. At current levels, it may be an attractive entry point.
Tread carefully when investing in emerging markets. China is no exception. Diversify and don't count on one region for global success. But do make sure you look far and wide for your next investment opportunity. As you scan the horizon, consider China. After a 23 % drop it may be an attractive candidate for your portfolio.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.