Tuesday, August 10, 2010


According to British author Sir John Bagot Glubb, the seven stages of an empire’s life cycle are as follows:
1. The age of outburst / pioneers
2. The age of conquests
3. The age of commerce
4. The age of influence
5. The age of intellect
6. The age of decadence
7. The age of decline and collapse.

“The 19th century was the century of UK, the 20th century was the century of the US, and the 21st century is going to be the century of China.”
- Jim Rogers.

“China is going to be an enormous force that will make the Japanese threats of the seventies and eighties look like a water pistol.”
- Jack Welch


1. .Valuations
a. China has been one of the weaker markets in 2010.
b. The market is currently trading at 12.3x 2010 earnings (12m forward earnings as at 28 June) with an EPS growth of 24% in 2010, 16% in 2011 and a trailing price to book of 2.4 times. India PE is currently 16x 2010 earning with an EPS growth of 27% in 2010, 9% in 2011 and a trailing price to book of 3.5 times. Hence currently India is more expensive that China.
c. Market is now pricing in too many concerns about future growth.
d. The numbers suggest that China is trading in line with its long-term historical average and at a discount to India.

2. Announcement on RMB
a. The latest announcement on the RMB has been a welcome step in the right direction.
b. This step was long awaited by not only investors but also governments across the world. We feel that this step might not provide any immediate impetus to the markets, but it does give the citizens of China better purchasing power in dollar terms over the next several years as China resumes its managed appreciation of the RMB.
c. The gradual approach is a positive step for exporters who could have been badly hurt had the Government decided to facilitate a one-off appreciation of the RMB.

3. CBRC and the Banking Sector
a. CBRC, the banking regulator in China, has indicated that "Stress Tests" have been undertaken to determine the sensitivity of loan books to the property sector. CBRC has concluded that property prices could fall by up to 30% in China before the banks would likely experience any material adverse effects.
b. CBRC also has strict liquidity requirements for Chinese banks and Tier 1 capital requirements in China now exceed those most developed markets. The capital raisings are a function of the extra-large loan growth seen in 2009 as the banks financed part of the Government's stimulus package.

4. Real Estate sector - prices
a. Real Estate or Property Sector has been hit the most in the current downturn.
b. Many Property companies are currently trading at well below their Net Asset Values.

5. Inflation

a. Inflation currently stands at 3.1% (May 2010).
b. Food price inflation has moderated since 2009, especially pork prices, which is an important meat staple in China.

6. Exports
a. Export data continued to surprise on the upside in May and June. Stronger than expected recovery in exports to USA and Europe and continued strength in exports to other emerging markets are driving growth.
b. Expect exports to developed markets to moderate in the coming months but exports should provide modest positive growth contribution in 2010.

7. Other Positives
a. Strong income growth for many years, and wages rising this year.
b. Almost no household debt, except mortgages.
c. Gradual rising availability of consumer finance.
d. Urbanisation means size of consuming population is increasing.
e. Retails sales rose 16.8% last year up from 2.1% in 2008
f. Urban household expenditure rising 9% YOY for last 3 qtrs.
g. Supportive Government policies/


Although our markets are likely to give us great returns going forward, do take a small exposure (of a maximum of 5% of your portfolio) to China. Further, as the Chinese market is also likely to be volatile, make this investment in small installations. Currently the easy ways to invest in China are:

1. Hang Seng ETF through the stock market
Return of 9.3% over the last three months.
2. JP Morgan JF Greater China Equity Offshore Fund
Investments, apart from China, also includes HongKong and Taiwan. Fund was launched in July 2009 and the returns till date is 8.04%. Returns of 10.66% over the last three months
3. Mirae Asset China Advantage fund
This is a pure China fund and was launched in India in October 2009. Return of 11.49% r over the last three months.

No comments:

Post a Comment