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Marks is buying Chinese stocks calls U.S. equities "fairly to fully valued"


racemize
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The valuation looks attractive:

http://www.gurufocus.com/global-market-valuation.php?country=CHN

 

But how do you find accurate data for China and Chinese companies?

 

Tilson's trip to China:

http://seekingalpha.com/article/1797182-observations-from-my-trip-to-china

 

From that link, it seems like Singapore's expected return is also high. Does anyone have any Singapore stocks in mind?

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Singapore stocks : I've been a shareholder since a year or 8 of the Jardine group of companies.

 

The main company is Jardine Matheson.

It's a holding that has stakes in diverse companies as Jardine Strategic, Jardine Cycle and Carriage, Hong Kong Land, Dairy Farm, Astra International, Jardine Lloyd Thompson, Mandarin Oriental.

 

It's an interesting group to study, with a controlling family and a nice track record. Maybe it could be of interest to somebody as Giofranchi.

 

It doesn't look to expensive at the moment. 

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Guest hellsten

http://www.marketfolly.com/2013/05/anthony-boltons-presentation-at-london.html

 

Over a  28 year period from 1979 to 2007 Bolton returned 19.5% annualised managing the Fidelity Special  Situations Fund.

Bolton’s China fund has struggled since its inception in 2010. It was clear from his comments that  his extensive experience in UK and European special situations had not prepared him for what he  encountered in China. He said that the reverse merger Chinese companies listed in the US were the  worst group he had ever seen. He estimated that about 80% were frauds.

 

Bolton lost some money in US reverse merger companies but he is now out of them. He warned that it is better to invest in companies in mainland China than those list on AIM or in the US. He prefers to invest in Chinese private companies rather than state owned enterprises.

 

Chinese official statistics are sometimes manipulated. Bolton said that you have to look at a range  of figures like freight volumes and electricity generation to double check. He thinks that the road to  social reform over the next ten years will be difficult for the Chinese. In the short term of a year or so he is expecting a big move up in Chinese equities.

 

http://www.marketfolly.com/2013/05/richard-titheringtons-presentation-at.html

 

Richard Titherington is the Head of the JP Morgan Emerging Markets Equity Team based in London.  In terms of price to book General Emerging Markets (GEM) is cheap but not at crisis levels. Because  corporate governance is shareholder unfriendly in many emerging markets, GEM may not actually  be that cheap. For example, many Indian and South Korean companies do not pay dividends.

 

Titherington likes China, Korea and Russia. He said that China is in the sweet spot, having both good  value and momentum. His main message was to buy what is cheap and unpopular and to sell what  is expensive and popular. Thailand and Indonesia are particularly expensive whilst Chinese financials offer significant value.

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An HK ETF probably is not the best way to go. Right now A-shares trade at discounts to H-shares (a few years back it was the other way around); they might be buying the A-shares.

 

I know but I wanted to stick with "safer", but they have appreciated nicely in a few months you have valuation metrics on hand on A shares vs HK? EV/EBITDA, PB, CAPE etc handy?

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Guest hellsten
  • 1 month later...
Guest hellsten

http://www.osam.com/pdf/Commentary_Jun2013_EmergingMarketOpps.pdf

 

MSCI China had a -0.23% annual return between Jan-1993 and Apr-2013. I'm very surprised that the returns are negative for China. Maybe time to buy China and emerging markets?

 

Valuation, dividend yield, and momentum

are great methods for global stock selection.

These three factors have been

predictive of future performance in

regions and countries around the world,

but they offer the most impressive

advantage in the emerging markets.

Valuation, for example, has been a

tremendous indicator of future

returns, with the cheapest emerging

market stocks outperforming the

Emerging Market All Stocks Universe

by 11.85 percent annualized. This is a

huge increase from the 4.67 percent

excess return earned by buying the

cheapest U.S. stocks.

The important point is that while these

factors work everywhere, they work

best in what we would argue are

the least efficient markets.

We believe these factors are immune

to socio-economic and political

idiosyncrasies because they are

driven by human nature. In every

country, unloved stocks have been

left priced too cheaply, allowing a

valuation-based strategy to thrive.

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Guest hellsten

Gurufocus on China and emerging markets:

http://www.gurufocus.com/news/242231/where-to-find-cheaper-stocks-global-market-valuation-2014

 

1. China

 

Chinese stock market index SSE Composite is now about a third of where it was in Oct. 2007. But its GDP is more than doubled since then. Therefore the ratio of Chinese total market cap is less than 1/6 of where it was in Oct. 2007, and it is sitting at the lowest point since 1991.

 

 

If Chinese economy keeps its past pace of growth of 15.75%, and the ratio reverted to the historical mean of 165%, Chinese market can deliver a gain of more than 30% a year.

 

But now Chinese economy is the second largest in the world, and its growth has dramatically slowed down. If we assume Chinese economy grows only 6% a year in the next decade, and the ratio of total market cap over GDP doubles from where it is now, we should expect more than 17% a year from Chinese market from today’s level.

Clearly, countries like Singapore, Australia, Spain, China and Brazil have the highest dividend yields. Countries like China, Russia, Singapore, Italy, Brazil have the highest potential from reversion to the mean. If we combine both, the best places to invest now seem to be China, Singapore, Spain, Italy, Brazil etc.

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Hellsten,

 

the problem with that quote is that returns on equities in a country in aggregate are not correlated to GDP growth over long periods of time.  Which is clear by looking at the dismal return of equities in China vs their great GDP growth.  More competition for that growth has cancelled out the benefits.

 

I do think many emerging markets are cheap though, but I don't think high GDP growth is in any way part of the story... it's about expectations and valuations.

 

Ben

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Guest hellsten

Hellsten,

 

the problem with that quote is that returns on equities in a country in aggregate are not correlated to GDP growth over long periods of time.  Which is clear by looking at the dismal return of equities in China vs their great GDP growth.  More competition for that growth has cancelled out the benefits.

 

I do think many emerging markets are cheap though, but I don't think high GDP growth is in any way part of the story... it's about expectations and valuations.

 

Ben

 

I think the quote puts things into perspective. Changing the variables to be more realistic cuts the projected returns in half, but you still get to keep the crazy volatility these countries experience every 10 years.

 

I'm no expert, but I find it hard to believe China's and Russia's GDP will continue to grow +15% per year in the future.

 

China:

"The GDP has grown at the annual rate of 15.75% over the past 8 years."

 

Russia:

"The GDP has grown at the annual rate of 16.97% over the past 8 years."

 

What other ways do people use to value emerging markets? Peter Lynch in one of his books compared the S&P 500 PE and T. Rowe Price New Horizons PRNHX PE Ratio:

"the best time to buy emerging growth stocks is when the indicator falls to below 1.2."

 

S&P 500 PE Ratio:

19.48

http://www.multpl.com/

 

T. Rowe Price New Horizons PRNHX PE Ratio:

30.01

http://portfolios.morningstar.com/fund/summary?t=PRNHX&region=usa&culture=en-US

 

30.01 / 19.48 = 1.54

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Hellsten:

 

I think the quote puts things into perspective. Changing the variables to be more realistic cuts the projected returns in half, but you still get to keep the crazy volatility these countries experience every 10 years.

 

I believe the intent with which you are saying this is wrong.

 

Peter Lynch in one of his books compared the S&P 500 PE and T. Rowe Price New Horizons PRNHX PE Ratio:

"the best time to buy emerging growth stocks is when the indicator falls to below 1.2.

 

PE ratios are useful for valuation for sure, but what does that have to do with economy wide GDP growth?

 

My point is that stock returns are correlated not with growth at the economy level, they are correlated with prices paid above replacement value.  While replacement value is a fuzzy term, what it means in reality is that unless a firm has a strong economic moat (which means it has a higher than stated book for replacement value, IMO), the growth at the econ level will not flow through to (excess) profits at the firm level (on a per share basis) that create a better than average ROE.

 

Basically, if the US grows at 2% (and everyone expects that to be the case) and fair value is a PE of 15x, but some other market (with the same laws and investor protections) grows at 8% (and everyone expects that to be the case) it also has a fair value PE of 15x.  The Lynch quote is stating (I think) the differential risk on a PE basis between US and Emerging stocks (20% premium for US stocks, presumably due to risk, forex, corruption, etc which seems reasonable to me).

 

Growth is very alluring, but sadly, unless a firm has a way to keep out new entrants, growth also brings (more than) it's share of competition, or it will have to raise equity capital to take advantage of the increasing market (your per share returns will be diluted).

 

Studies have been done repeated in many markets that show no correlation from GDP growth and per share investor returns (it's actually slightly negatively correlated, I believe because higher valuations are often paid, erroneously, for high growth economies).

 

This *feels* wrong, but it's logical.  There will always be companies with moats and high operating leverage that can break the mold, but they are rare, and on the aggregate it is not the case.  The additional upside of economic growth is counteracted by the additional downside of competition.

 

You value stocks in emerging markets just like stocks in the US... but don't think that profit growth will be higher because of better GDP growth (again in the general case).  That is only a benefit if the GDP ends up being better than the markets and competitors are expecting.

 

Ben

 

Side note -- Growth deviations from expectations have huge impacts on stocks (recessions, etc)... but this is not the same as what I'm saying above.

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If we assume Chinese economy grows only 6% a year in the next decade, and the ratio of total market cap over GDP doubles from where it is now, we should expect more than 17% a year from Chinese market from today’s level.

 

 

Not quite. Growth is funded by investment and that is invariably done by issuing more stock. So while earnings would grow in line with GDP and stock market would grow in line with earnings, that does not translate into a corresponding per share growth in earnings which is what really matters to the investor.

 

Vinod

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Guest hellsten

PE ratios are useful for valuation for sure, but what does that have to do with economy wide GDP growth?

 

My point is that stock returns are correlated not with growth at the economy level, they are correlated with prices paid above replacement value.

 

Yes, over longer periods of time. All value investors agree with this. I think Peter Lynch used the ratio for finding "Growth At A Reasonable Price". I see the Gurufocus and CAPE statistics merely as hints to where to look for bargains.

 

If we assume Chinese economy grows only 6% a year in the next decade, and the ratio of total market cap over GDP doubles from where it is now, we should expect more than 17% a year from Chinese market from today’s level.

 

 

Not quite. Growth is funded by investment and that is invariably done by issuing more stock. So while earnings would grow in line with GDP and stock market would grow in line with earnings, that does not translate into a corresponding per share growth in earnings which is what really matters to the investor.

 

Vinod

 

Yes, good point.

 

Howard Marks said this in late 2013:

As readers of my memos know, I believe strongly that (a) most of the key phenomena in the investment world are inherently cyclical, (b) these cycles repeat, reflecting consistent patterns of behavior, and © the results of that behavior are predictable.

 

Of all the cycles I write about, I feel the capital market cycle is among the most volatile, prone to some of the greatest extremes. It is also one of the most impactful for investors. In short, sometimes the credit window is open to anyone in search of capital (meaning dumb deals get done), and sometimes it slams shut (meaning even deserving companies can’t raise money). This memo is about the cycle’s first half: the manic swing toward accommodativeness.

 

Marks is the canary in the coal mines that likes to chirp.

 

This story will be interesting to follow into 2014:

http://en.wikipedia.org/wiki/Chinese_Banking_Liquidity_Crisis_of_2013

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