A Look at China’s P/E Ratios:

Quite a few readers have been wondering whether the relatively high P/E valuations of China’s equity markets were justified. This is my response: I would say that type of PE valuation is reasonable for most of the Chinese companies. As everyone knows, growth in China has been very robust over the past several years, and should remain strong over the next several, despite a slowdown in the rate of growth. To quickly quantify this argument we can take a look at the Shanghai SE Composite’s 2Q08 aggregate PE and divide that by China’s YoY GDP growth for the same period, and compare the data to against other markets (see chart below).

Select market PE's to underlying country's GDP growth

Source: Bloomberg

Looking at the chart above, despite China’s seemingly high PE valuations, in terms of PE to GDP they are actually the cheapest market in the set with a PE/GDP ratio of 2.1. Looking ahead, Chinese growth will continue outpacing its industrialized counterparts over the next several years, and this should help support its market. In fact, during this period we will likely see China’s domestic sector replace the export sector as the main engine of growth. This should partly be catalyzed by higher domestic incomes and growing domestic demand, coupled with a slowdown in consumption by industrialized nations. Of course from my experience, one of the big question marks for China’s market is the impact of any new government policies. However, given the expected weakness in the export sector, recent inflation moderation, and the slowdown of the GDP growth rate, I expect future policy to be accommodative to domestic growth.

Also, I will be traveling for the next couple of weeks, so I may be slow to post new entries. However, I will randomly be checking email.

Thanks!

Looking for Alpha through Beta

We still believe there are a lot of good values out there on the Global EQ markets. We are anticipating that China will continue to outperform the US, and India may even outperform China. Looking to take advantage of these markets we found the following two ETFs IFN & FXI, for India and China, respectively. Of course the major risk being here any slight decline in the US market will be exacerbated in these markets do to their high betas. Although at times this can be used for your advantage. Take for example last week when the Indian market dropped something like 15% on Monday and Tuesday, this would imply a substantial loss (probably near 5%) for the SP500. Now when the markets opened IFN dropped from trading at around 55 to 48, to catch up with the Indian markets, but when the 5% loss to the SP500 did not materialize (mostly because of the 75bp cut announced before markets opened) the ETF went back to trading around 54. After the Fed announced the 75bp rate cut (the Fed usually makes these surprise announcements at 8:15 am) the US EQ futures market recovered from what was setting up to be a very negative open(-5%). Since the Indian markets were already closed and had experience a devastating loss over the prior two days the ETF, accordingly, opened significantly lower, but since the loss in the US markets didn't substantiate the kind of loss seen in India, it quickly recovered. Meaning if this trade were executed you could have seen gains of over 10% within a couple of hours and in our view with limited risk.

As we have said continually we do not believe the US is going to move into a recession, meaning these markets should continue to outperform. We are also looking into the outlook of the Las Vegas Sands (LVS) before their Feb 4th earnings report, we believe the price has been unjustifiably depressed and earnings could surprise to the upside. This is in no way an investment recommendation, but please feel free to look into the data yourself.

*Sorry for the delay in posts we were in the process of relocating to a nicer space.