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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

It’s Time to Buy China

November 30, 2012 | About:

The past two years have been volatile for investors in virtually every market, but they have been particularly unkind to investors in China. Chinese stocks, as measured by the iShares FTSE China 25 Index ETF (FXI) spent most of 2011 and 2012 in a downtrend, though in the past two months they have shown signs of life.


Should investors take this rally seriously? Or is it yet another fake out destined to burn them?

Right now, the upside potential in China far outweighs the downside. China is a buy.

You’re probably raising your eyebrow right now, but hear me out. China is one of the cheapest markets in the world right now. Chinese stocks trade for just 7 times earnings, less than half the valuation of American stocks as measured by the S&P 500. And at the same time, sentiment towards China is downright horrid. It’s hard to find anyone who is actually bullish on China these days. A Google search for “China” and “hard landing” returned over 3 million hits.

I know, I know. You can’t take Chinese earnings seriously because they cook their books. Fair enough. I actually agree that you have to take most Chinese data releases with a grain of salt. But many of FXI’s core holdings—such as China Mobile (NYSE:CHL), the largest mobile phone company in the world by subscribers—trade in the United States as ADRs and meet international reporting standards. And when they are priced as cheaply as they are today, there is certainly margin for error if earnings reports are a little on the aggressive side.

Furthermore, the macro picture in China—which was never nearly as bad as the media hysteria would have suggested—appears to be stabilizing. The China Manufacturing Purchasing Managers Index improved in November—the first improvement in 13 months—and profit among Chinese industrial companies rose 21% last month.

China is still far too dependent on capital spending and exports; for the country to have anything resembling a balanced economy it needs to see the consumer sector playing a more prominent role. But for now, I am comfortable investing in China.

Buy FXI at market. But use a stop loss or a trailing stop to protect yourself in the even that investors get spooked again and send shares lower. While I am bullish on China at this time, a Eurozone “blow up” or a turn for the worse here in the U.S. could spill over into the Chinese market. A 15-20% trailing stop should be sufficient for now.

If investors “rediscover” China, we could see 50-100% gains over the next 12-24 months if recent history is any guide.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

Visit Charles Sizemore's Website

Rating: 2.9/5 (14 votes)


Melcome - 4 years ago    Report SPAM

finally someone with some fortitude! Yes there MUST be opportunities that is a fact.

Any rational investor will have to come to this conclusion.

DISCLAIMER: I'm not endorsing any investments.
Aldandrea - 4 years ago    Report SPAM
I disagree entirely and anyone investing in China should be prepared to have their head handed to them. The reality in China -- of inventory piling up in warehouses because the central govt. is afraid to stop manufacturing (and put people out of work) and construction of empty cities -- is probably far worse than being reported. The fact that Europe - a market upon which China is heavily reliant - will likely be in worse shape in 2013 does not bode well for China either. There are a myriad of other internal reasons -- including unprofitable capital allocation, geographic constraints, endemic poverty, contentious ethnic factions, geographic wealth concentration, widespread censorship and propaganda, increasing social unrest, lack of rainfall to support agriculture, and a poor national transportation, not to mention a brutal and insular political system that allows the leaders to clap each other on the back about how great China is while they ignore the stark reality -- that China will be less and less prosperous going forward.

When you think of China, think of Japan. In the late 1980s, Americans thought the Japanese were going to take over the world. The were buying Rockerfeller Center, Pebble Beach and other important American icons with no end in sight. What got them to that point was an economic model that did not allocate resources to profitable endeavors as is largely done here in the US. I can become an enviable world class manufacturer if, at a national level, I don't care that my manufacturing activity is, in reality, unprofitable and create a doomsday financial machine that allows that unprofitable activity to occur for years and appear profitable but that also means that in the end I will pay a terrible price. Look at Japan today. That is in many ways China's future, although the situations are not identical.

Further, anyone who believes that the US cannot manufacturer will be quite surprised going forward. From a geopolitical standpoint, because the US needed Japan and to a lesser extent China as allies against the Russians during the Cold War, we allowed our manufacturing to decline and tolerated making those "allies" prosperous by buying their manufactured goods over our own. There is absolutely nothing to prevent the US from deciding that those days are over and to make it so that Japan and China cannot dump their unprofitable goods on us anymore, Indeed, to some extent this is already underway.

Last, although somewhat off the topic but certainly related, anyone who thinks the US is in secular decline should reconsider. The US has many self created challenges, no doubt, and the low birth rate and aging population demographic changes that are coming will bring added challenges, however we are blessed with enviable capital allocation, financial and free enterprise systems, natural transportation infrastructure (rivers), weather, education, immigration, natural resources (including more energy now!) and many other advantages not least of which is that we have no natural enemies and sit astride TWO oceans and their vast respective economic zones and completely dominate the world's seas militarily.

With few exceptions, money being put into China is clearly speculation not investing and should be left to those who have feet on the street in China and more knowledge than can possibly be gained from an ocean (and culture) away.

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