— This is the script of CNBC's news report for China's CCTV on May 25, Monday.
Welcome to CNBC Business Daily, I'm Qian Chen.
While some singular stocks could see some volatility, Dennis Gartman, the widely-followed analyst tells CNBC the average investor shouldn't be afraid of investing in China, the world's second-largest economy.
China stocks finished off last week at seven-year highs. On Monday, Shanghai Composite Index extended another huge run, making A shares nearly doubled in just the past 6 months.
Hans Goetti, from Banque INT'L A LUXEMBOURG, says he remains bullish on Chinese equities for the following reasons:
- The economy is slowing quite significantly and he can, therefore, expect further monetary and fiscal stimulus. Monetary stimulus has been the main driver of asset prices not only in China but everywhere else.
- Real interest rates in China are high due to continued deflationary pressures. The PPI has been in deflation for 37 months in a row. This means we will se further interest rate cuts to lower financing costs and further RRR cuts to counter balance capital outflows.
[Hans Goetti, Banque INT'L A LUXEMBOURG] "Real interest rates in china are still high, we have deflation in PPI, in fact, for more than 3 years, the PPI has been in deflation. we see further interest rate cuts, we see further cuts in RRR to counter capital outflows. All these are very supportive of equity prices, and of course share ownership among households are still very low, so there's more room to grow."
China and Hong Kong will start cross-border sales of funds on July 1, widening access to financial markets and capital in the world's second-largest economy.
The initial quota will be a total 600 billion yuan, split evenly in each direction. Although some analysts predict the program will benefit Hong Kong more, Hans Goetti believes the Chinese bond market will be attractive to foreign capital.
[Hans Goetti, Banque INT'L A LUXEMBOURG] "One thing we have to bear in mind as well, maybe its a related subject, is the bond market in China, which at some point, showed that its open to foreigners as well. I think if you look at the interest rate level, slowing economy, you are gonna have a scope of much lower interest rates, and bond market should not be igobred. it's a two-way street of this whole issue here. but you are right, it's more towards a south-bond when it comes to the mutual fund theme."
There's another way to look at the Chinese stock market.
Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett.
Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."
If we take a look at US equity market, year 2000, year 2007...
Now, the China GDP in 2014 is RMB 64 trillion, with its equity market cap hopefully hitting the same level shortly.
Even though some argue that the Buffett Valuation Indicator might not suit well for current Chinese stock market, others say it does send out a "caution" signal to investors.
CNBC's Qian Chen, reporting from Singapore.