Friday, May 3, 2013


Stereotyping and groupthink is still quite common among investors. In spite of so many case studies business graduates go through, so many of US and Canadian business schools have located campuses all over the world, we still have in built biases against foreign corporations. So when a few companies are accused and found to be perpetrating fraud, the market just trashes the entire country, entire region and even an entire people. Investors should carefully review their biases against countries such as Russia, China, India and Brazil, the so called BRIC nations once considered a very attractive region for investors. Our negative biases may be inappropriately placed. We quickly forget that the world's biggest gold fiasco named BREX didn’t happen in China but right here in Canada. We forget that it was our highly paid ivy league graduates who work on Wall Street and are responsible for much of the global malaise facing us today. 


Without doing a rigorous statistical analysis, it is impossible to tell whether emerging markets in general and Chinese markets in particular are any more rigged than our own. We should rely on the old fashioned valuation techniques and parameters like price earnings ratio, return on equity and growth rate. The same parameters we have used for decades.Sure there will be wind ups, bankruptcies and frauds, both here and abroad. The only truly effective tool for managing such risk is the old fashioned diversification, i.e. limit your exposure to any stock or any country to a few percentage of your portfolio. When a torpedo does hit your holding, chalk it up to an uncontrollable event.

Based on old fashioned valuation considerations, as practiced here© General Valuation Model finds emerging markets incredibly cheap.  Dow and S&P 500 have already clawed up to levels not seen before the financial Armageddon in 2008,But most other markets are still way off the peaks achieved in 2007- 2008 time frame. Even our own Canadian market which is still far from the highs.

Going back to the themes that are still in play, we can conclude that there still is decades of growth left in China and otheremerging markets.  China trading at eight times earnings, with companies that will again grow at doubles digit rate is still the best bet. I particularly like iShares FTSE China 25 Index Fund (FXI) as it is comprised of some of the fastest growing companies in the world and pays 2% dividend as well.

FXI was trading close to 70 prior to the market meltdown in 2008. AT current levels ($36) it is nearly half off while most much slower growers including US are back close to the previous highs. Last time I read the reports, China was still growing at more than twice or even three times the growth rate of our economies. And rumor is that they are the only ones with spare cash to lend to the rest of the world. So why such a discount? My conclusion is that it is simply influence of bad press and several fraudulent failures which has spooked money mangers all  over. This smells like an opportunity.

FXi is not the only way to participate in the Chinese stock market. I also like the China funds (CHN) and the greater China fund (GCH). FXI is however most liquid and widely followed.

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