The credit crisis is indeed global, but it doesn’t hurt every country to the same extent. China will not suffer as much as the U.S. and should recover faster. Benny Wong, director and head of research at BOCOM International, talks about what this means for Chinese stocks sold in Hong Kong and the U.S. Should you make these stocks your first buy in troubled times?
Not long ago, analysts were wondering when stocks in Hong Kong would become attractive after plunging about 50% in 2008. “If you had asked me three weeks ago, I would have said, ‘Now,’” said Wong, seated in a small conference room at the Hong Kong subsidiary of China’s Bank of Communications. “But the collapse of Lehman Brothers changed everything.”
Suddenly uncertainty reigned. Wong, however, was on familiar ground, having endured the tumultuous Asian Financial Crisis that started in 1997. “You have to depend on your gut feeling. No analysis, technical or fundamental, is any good.” Before the current crisis, for example, analysts thought beaten-down Hong Kong stocks looked good because their ratio of price to earnings (P/E) was around historic low levels. This generally signals an imminent rebound. But now earnings are on a slippery slope and no one knows when they’ll hit bottom.
While the same uncertainty grips stock markets around the world, there are differences for stocks related to China. One is that companies listed on domestic Chinese exchanges are largely insulated from overseas turmoil.
“In a way, capital markets in China are on their own.” China’s currency is not freely convertible, and foreign purchases of stock on Mainland markets are extremely limited. This means exchanges in Shanghai and Shenzhen will not depend on jittery overseas investors to spark a rebound. Given continued good economic growth in China, the bull should return to Shanghai and Shenzhen before it charges into New York and London. A turnaround in the domestic China market will benefit Chinese stocks sold overseas – indirectly. Companies listed abroad are also sold in China. When these companies’ prices rise on the Mainland markets, Chinese investors look to buy the same firms overseas at cheaper prices. The amount of Chinese investment that can reach overseas is limited but growing.
Even more than relative isolation of Chinese capital markets, the key for Chinese stocks is the prospect for strong economic growth in China. Certainly China’s important export sector will take a big hit as overseas demand slumps. But experts say China’s economy will continue to grow at a slower, but still healthy pace. The International Monetary Fund, for example, predicts China’s economy will expand 9.3% in 2009, down from the red-hot 11.9% clip in 2007 and from 9.7% this year. The U.S. economy, by contrast, will be “very ugly” in 2009, Wong said.
Better economic growth would translate into more stable earnings for many listed Chinese companies. “Definitely it looks like Chinese stocks will be hit less than those in the U.S. .... Two years from today, I think the U.S. index will still be flat. The right Chinese stocks will make a handsome return, and even if you make the wrong pick, there’s less risk on the downside.”
So, what will be the right Chinese stocks? Wong likes banks. (Reminder: BOCOM is a subsidiary of China’s Bank of Communications.) “A good time to buy might be 2009 because China’s fast economic development is not over…. And the best proxy for economic growth are banks.” U.S. banks, of course, are collapsing at an alarming rate, but their Chinese counterparts have much less exposure to bad loans. “For U.S. banks the risk of damage is to the balance sheet, which is more fatal. For Chinese banks the risk is the crisis will hurt profits and losses.”
Chinese banks and other companies still face potential problems from domestic factors, Wong warned. Banks, for instance, are exposed to the slumping local property market. And some American banks that are forced to sell off assets may dump holdings they picked up when a number of Chinese banks went public in the last few years. Still, Wong is positive about the banking sector.
Another potentially attractive sector is retailing. This area has been booming as personal incomes soar. “Retail in China so far is still strong. It’s the last defense (economically) because the export sector is bad. The government may try to hold up domestic spending by cutting income taxes.”
One area to trend carefully in is commodity companies because they depend on prices set globally. Prolonged flat economic growth in the U.S. and Europe will restrain prices of oil, aluminum and other commodities. “In two or three years maybe the bull market in commodities will return, mainly because the U.S. dollar might fall.”
In the meantime, though, investors would do well to consider China-related stocks when they take the plunge back into the markets. End
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