BUY CHINA !
BUY CHINA !
In a recent post titled CHINA MALAISE ? we warned about the risks of a wash out in Chinese equity markets due to worries about a softening of China’s economic momentum and about the Donald Trump Trade War.
Indeed, Chinese equities went into a severe correction in the past couple of weeks and are now down 25 to 27 % on average since their January 2018 peak.
In the past few days, we had the signs of a climatic sell-off while the indexes were reaching our long term buying targets. They have retraced the 61.8 % Fibonnacci of the the entire 2016- 2018 Bull phase. ( see charts below )
Hong Kong listed Chinese H-Shares Index
Shanghai Composite Index
Shanghai Shenzhen 300 Index
FT China 50 Index of the largest cpailtalizations
Chinese equities are CHEAP !
Extremely cheap in fact . at 8.25 x earnings and 4.14 % dividend yield, with a Price to Book value of 1x and many large companies trading at a discount to their book value, bargains are to be had and there are many large companies trading at very low P/Es with Hugh dividend yields.
The recent correction is a great opportunity to accumulate world leaders at bargain prices.
We went long CHINA in our Model Portfolio
The YUAN is a STRONG BUY!
On June 14th 2018, the FED raised interest rates and contrary to what happened in the past, the Chinese Central Bank PBOC did NOT raise its own benchmark rate, sending shivers into the financial markets that interpreted it as a sign of worry by the Chinese Government about the pace of economic growth.
As a result, the Chinese Yuan fell sharply form 6.4 to 6.70 yesterday, until the PBOC intervened and committed to defend and stabilize the Chinese currency.
The trading pattern of the past week is a clear BUY signal for the Yuan.
The Trade War may be over !
We are today the 3rd of July and the crucial deadline is July 6th, the day on which American and Chinese reciprocal tariffs are scheduled to be implemented.
As we have argued in our various posts on the trade war, the Chinese do NOT like confrontation and even less disturbances.
The Chinese economy has reached the stage where it needs and has to switch form an export-led economy to a consumer economy and where the relative purchasing power of the Chinese must prevail over the competitiveness of exports.
This entails a significant and sustainable appreciation of the Yuan, which would result in an automatic diminishing of the trade imbalance with the US.
China knows that full well and, until now, was trying to manage the change gradually, as always.
However, and as was the case with the North Korean issue where the military gesticulation of Donald Trump forced the Chinese to accelerate the peace process on the Korean Peninsula, the looming Trade War may just be the catalyst that will make the Chinese Government make a drastic move and announce a change of strategic policy.
Such an announcement could well encompass a commitment to make the Chinese currency rise structurally and to decrease the massive foreign exchange reserves held by China, including its holdings of Treasure bonds.
This could well happen in the next few days before the tariffs are implemented.
…. And it would have drastic implications for the currency rate and for the Chinese equity markets.
If this happens , Donald trump will have won his trade war !
Originally published at Mechelany Advisors.
