What Are You Doing With Chinese Stocks Now?
The last few months have been rough for China’s economy. Businesses are struggling, and China stocks have been poor performers. But that’s all about to change… I’ll tell you why in a moment.
If you hold Chinese stocks, the last few months have used up a lot of your willpower.
Stocks in China are taking it on the chin… all because of the economy.
Consider this…
China is expected to grow around 9% in 2011. While that kind of growth is fantastic, it creates some problems. The biggest is the inflation threat to economy. See, growth is driven by demand… and the demand for commodities and other goods is jumping.
Millions of Chinese are reaching the middle class… and that means lots of new consumers with pockets full of money.
And these consumers want to buy!
As a result, Chinese government officials are having to battle back inflation. A little growth is good… inflation (too much growth) is bad. And the communist leaders know inflation causes people to do crazy things – like overthrow governments!
So they’re working hard to control inflation.
In March, China witnessed consumer prices skyrocket over 5%. That’s a 5% jump in prices in one month’s time! That rate is unsustainable.
So, in early April, the Chinese Central bank increased interest rates again. All in an attempt to keep the “Inflation Tiger” caged.
The central bank is also using other unique techniques to cool off the economy. They’ve been asking companies not to increase prices. They’re forcing banks to pay higher interest rates (to take money out of circulation). And they’re increasing reserve rates at banks to cool lending.
They’re even tightening down on lending standards for real estate.
They’re doing anything and everything in their power to keep growth low and slow.
As a result, the markets’ haven’t been kind to Chinese stocks.
In just the last two months we’ve watched as the Shanghai Composite plummeted by over 11.4%.
Chart courtesy of stockcharts.com
It’s ugly.
I don’t care who you are. If you’re sitting on Chinese stocks right now, you’re second guessing your investment decision. Getting hit with more than an 11% loss in just two months is never easy.
However, let me encourage you to hold tight to your Chinese stocks… And if you don’t own any right now, consider adding Chinese stocks to your portfolio right now.
Why?
Remember, the same threat to China’s economy is what’s going to drive stock prices higher. The central bank may want to slow down growth in their country… but they’re still growing and growing rapidly.
It’s estimated around 600 million people in China will reach middle class status in the next decade. If you think the buying frenzy is crazy now, just wait.
Companies who are aggressively expanding in China right now will reap the rewards in a few years.
Growth will not only drive prices higher, but sales volumes as well. And with the recent down draft in the market, company valuations are at ridiculous levels.
Consider this…
Just today I used a powerful database to screen for Chinese stocks. Out of the tens of thousands of companies traded in the US markets, the system identified 250 stocks as being based in China.
Then I screened the group based on valuation.
I started looking at Chinese companies trading at deep discounts to earnings. My focus was on P/E ratios. Now, before I go any further, let me remind you the P/E ratio compares the value of a company to their earnings.
Here in the United States, the S&P 500 has an average P/E ratio of around 15x. That means you’ll pay 15 times earnings to buy the average American stock.
Of the 250 Chinese stocks in my database 78 are trading at ridiculously low P/E ratios.
What’s ridiculously low?
Try a P/E of under 5!
So more than 31% of all of these Chinese stocks are deeply discounted. But what’s more amazing…
17 of the companies I screened for are trading at P/E ratios below 1.0x. That’s right, a P/E of one! In other words, you can buy these companies for about what they drop to the bottom line in earnings.
Talk about scooping up deep discount stocks at ridiculous valuations.
Now let me warn you, you have to do your diligence. You can’t run out and buy everything you see. Take some time, do a little research… and grab a few of your favorites.
You many never see Chinese stocks this undervalued again!