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Global Top Cat

China: Raging Bull

By Yiannis G. Mostrous, on Apr. 30, 2015

Seven months ago, we highlighted the selloff in Chinese equities as a solid entry point for investors with a longer time horizon, citing the market’s inexpensive valuation, the prospects for decent economic expansion this year and an impressive long-term growth story. (See A Long-Term Bull in the China Shop.)

We reiterated this call in February 2015 and booked a 33 percent profit in Cheung Kong Holdings (Hong Kong: 1) and a 62 percent gain in China Pacific Insurance Group (Hong Kong: 2601). (See Top Asian Equities for 2015.)

This time around, we’re selling China Unicom (Hong Kong: 762, NYSE: CHU) for a 32 percent gain since we highlighted the stock in the Oct. 18, 2014, issue of Capitalist Times PremiumAlthough the telecom company has continued to deliver the goods, its American depositary receipt (ADR) has hit our price target.

Return of the Macro

We remain bullish on Chinese equities in the near and long term. The MSCI China Index has surged more than 28 percent this year, but more upside could be in store as investors rotate capital to markets that can provide compelling returns in an aging bull market.

(Click graph to enlarge.)Second Article -- MSCI China Price Graph

And whereas US equities have surpassed their 2007 high by more than 30 percent, the Chinese market trades about 20 percent below its high. Depressed bond yields also suggest equities could have more headroom.

Recent capital flows indicate that some of this liquidity has spilled into nearby markets. Over the past four days, Taiwanese equities have experienced US$2.6 billion of net foreign buying, while US$1.7 billion flowed into South Korean stocks.

Despite recent rallies, neither of these developed Asian markets appears overly crowded; annualized net foreign purchases represent 1.3 percent of Taiwan’s market capitalization and 0.9 percent of South Korea’s market cap—much lower than recent highs.

The liquidity sloshing around China’s equity market and into neighboring countries doesn’t reflects excess savings of US$19.5 trillion, a surplus that’s expanding at an annual rate of about 16 percent.

Chinese investors have long favored real estate investments, but the cooling of this formerly overheated market has forced them to seek alternatives. A good chunk of this capital will flow into stocks.

Many commentators dismiss the strong returns posted by Chinese equities this year as a liquidity-driven move—a criticism that holds some truth, but smacks of nitpicking.

Every bull market needs liquidity to advance; fundamentals alone won’t necessarily pull stocks higher. Meanwhile, Chinese stocks trade at favorable valuations and should benefit from decent earnings growth.

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