Current Market Conditions And Investing In China
6 October 2020
Hey, The Investor’s Podcast Network Community!
One of the most popular questions Preston and I have received lately is about the investment potential of China.
If we look at the Chinese stock market, it’s priced at an expected 6% yield compared to other indexes such as the Canadian index (5%) and the S&P500 (3.5%). As we learned on our show recently, Lyn Alden has found that cheaper stock markets generally outperform more expensive markets, though not as aggressively as it would look like on face value. It comes with more risk too. For instance, Turkey is currently priced at a 14% expected return. Still, given the currency and political risk, the investment is far from being as attractive as if the US was priced similarly.
Given the extremely low interest rate, the rise of China, and an expected 6% return, it is worth looking into the Chinese stock market. Charlie Munger has, for more than a decade, been vocal about how US investors missed out on the Chinese stock market. Despite the encouraging words from Munger, the Chinese stock market had for long been a black box for me, and it took years before I built my first position in Chinese stocks.
What really changed for me was when I started to think of countries and ideologies in terms of “data processing systems.” There is this famous story of a government official from the Soviet Union visiting the US being highly impressed by the supply of bread. He simply couldn’t understand how the Soviet Union could have citizens waiting in line for hours when it wasn’t the case in the US. When he asked for the person in charge of bread planning, he was told that there was no line because the government didn’t plan bread production.
The point of the story is that capitalistic, decentralized countries like the US are much more competitive than communist countries like the former Soviet Union because their data processing systems are better.
So where does that put China in the 21st century? For anyone who has ever visited China, I’m sure you’ll agree that while China is communist on paper, it’s actually an extremely capitalist economy and, sadly, with a lot less personal freedom than in the west. Then consider that their ironical centralization of data might be an advantage when competing today.
Today (and in the future), competitiveness is measured by the amount of data you have available. The FAANG stocks are just one example of this. The Chinese government is shamelessly using major national and private corporations to collect and store more data than any other country in the world. As much as I’m worried about privacy from a private citizen perspective, I see the potential as a stock investor.
My exposure to Chinese stocks is partly through my position in Alibaba, which is both a bet on the Chinese economy prospering long term and on the company’s ability to collect and use data about their customers. I pitched Alibaba on the Q1 2019 Mastermind Discussion, and while the stock is up more than 55% since then, I’m still holding it. At the current price level, it’s not as attractive. However, you might find the case study interesting.
I wish you the best of luck in your analyses of Chinese stocks. If you’re not comfortable picking individual stocks, but still like to have exposure to equities, you may consider a Chinese ETF tracking the entire market.
If you’re more comfortable with individual stocks trading on the NYSE, make sure to check our most recent intrinsic value assessments. Since the last newsletter, Preston and I have analyzed H&R Block and Euronav. You can find all of the intrinsic value assessments Preston and I created with our team here.
Lastly, I would like to take the opportunity of presenting a new section in our newsletters. Every year, Preston and I pay several thousand dollars to our email marketing service provider for storage, even though we typically send out only a few (this is our 5th newsletter in 2020). Because of this, we’ve considered putting a stop to our newsletters.
However, providing free content has always been at the core of TIP, and we aim to send out both free podcasts and many more free newsletters in the future. We have therefore decided to team up with advertisers for our newsletters moving forward. For this newsletter, we’re grateful that BlockFI has offered to sponsor it. We hope that you’ll welcome BlockFI as well as any future advertiser who has chosen to empower the TIP community.
Please stay safe!
Warmly,
