by Keith Fitz-Gerald, Money Morning
There are few things more exciting in the investment business than finding a golden opportunity staring you in the face.
That's why I do a lot of research. Because I know that the more I dig, the greater the chance I will find something that others miss, that leads to big opportunity.
Just like when I revisited China's recent economic data, looking for something in there that indicates whether the country's economy is any closer to reviving its engine of growth. And its stock market, too.
The Chinese stock market has fallen 40.9% since August 2009, leading Oppenheimer to refer to it as a "dead animal" and millions of investors to conclude it's a lost cause.
All the more reason to dig... And there it was.
I knew then I had hit pay dirt...
Chinese M&A activity is soaring. Why would that happen in a market given up for dead?
Because key market forces are actually growing.
Here's the evidence.
Strong Chinese M&A growth wouldn't be happening if it weren't for the nearly two-thirds of all M&A activity occurring in industrials, energy, and power deals that are running 31% ahead of last year.
Chinese tech M&A is even better and is 62% ahead of last year.
Here's more evidence that China has the economic chops to re-ignite its stock market.
China's PMI (Purchasing Manager's Index) is expanding, coming in at 50.3 versus expectations of 49.8, according to Bloomberg's survey of economists. Levels above 50 are consistent with expansion.
China's still growing at 7.5% a year. So what if it's down? That's a whole lot better than the 2% to 3% we're seeing in the West.
The nation is making the transition to consumer-based growth. People are pooh-poohing this concept, forgetting that Japan, Korea, and Taiwan all made this transition, too.
Chinese home prices are not out of control like "everybody" thinks. In fact, in inflation-adjusted terms, prices have been falling since Q2 2010 exactly as the government intended when it tapped on the credit the brakes.
Additionally, the ratio of Chinese home prices to income has fallen by just over 50% since Beijing first began to rein in real estate speculation as a part of its broader economic picture. The ghost cities in the news aren't what people think and are certainly not symptomatic of the entire nation.
General Motors and other companies like it continue to sell more product there than any other place in the world. That wouldn't be happening if the nation was falling apart.
Now is the Time to Buy Chinese Stocks
There is nothing unusual in China's market retreat. Pull backs of 40% to 60% are not uncommon in any market, but especially in China where capitalism, for all its ferocity, is still in its infancy.
For all the hype surrounding its seemingly inglorious fall from grace after leading the world out of the global financial crisis, the country is still in the early innings of what will go down as the greatest wealth creation mankind has ever seen.
This is a fantastic situation for stock investors in general and for us specifically, which is why it's time to re-enter Chinese stocks:
- The bearish case for China is dramatically overdone.
- The Chinese stock markets are cheap when measured by PE. Right now, the markets reflect an average PE of just 7.1 and a yield of nearly 5%. (By comparison, the S&P 500 has a PE ratio of 18.57 and a yield of 2.07%.)
- The yuan will float by 2015. We've talked about this for years. What's important to understand is that it will "unlock" trillions of dollars in trading value that is presently unrecognized.
- People hate Chinese stocks at the moment.
The bottom line?
China remains a "big idea" trade. It's not going away any time soon and the genie is not going back in the proverbial bottle. The decline that everybody is so worried about is probably closer to being over than it is to when it got started.
Here's how you can participate in China's market move: Buy iShares China Large-Cap (NYSEArca:FXI) ETF. It has exposure to all the top Chinese companies like CNOOC and Bank of China.
Keith covers companies like these and finds the right market opportunities in his Strike Force service.