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Tuesday, July 13, 2010

Random thoughts on current issues

There is just a huge disconnection between China equities and its economy. Whilst the Chinese economy continued to do well by posting double digit yoy growth, its equity market performance was just pathetic. CSI 300 index has fallen by 25% YTD, as compared to KLCI's gain of 4% YTD. Currently, the Chinese equity market is trading at one of its lowest levels at PER of 13x for 2011 as compared to its historical levels of 30x, even lower than Malaysian market's PE of 13.5x.

There are just many lingering issues surrounding China's economy i.e. asset bubble, labour strikes, fallout in exports owing to EU and US problems, higher yuan etc etc. Are these concerns overblown? Hyped up too much by the media? (Some fund manager just told me not to listen to the media too much as most news would be exaggerated with a minor issue could potentially become a full-blown crisis in the hands of media. Hmmm...Well, I'll take the middle ground :) It's good to have info from the media but try to analyze the issues and judge for ourselves how serious they are)

China's economy is having a transition of becoming a domestic-driven economy from an export-oriented economy. In 2009, China's economy continued to register robust growth despite the drop in net exports. The economic growth was mainly driven by domestic consumption and private investments. Thus, a higher yuan and demand for higher wages by labourers will help domestic consumption and lead to a firmer economic growth. With imports becoming cheaper coupled with higher income, consumer spending is bound to rise. A higher yuan also allows EU and US exports to be more competitive which could help cement a firmer recovery in these western countries while inflation in China could be contained though this is not an immediate concern yet.

Real estate prices appeared to moderate as evidenced by two months of slowing property price increase, indicating that government's efforts to cool down the real estate market seem to bear fruit, allaying fears of property bubble burst. What I see is that the Chinese government is trying to control the supply of properties and therefore could help put a lid on property prices. However, prices won't go down much owing to majority of high-end properties are bought with cash. Incoming supply of properties in 2H 2010 could help contain the price increase.

On Chinese trade, exports continue to do well with exports to US and EU registering growth of more than 40% yoy, despite the weak recovery and lingering debt concerns in these countries.

On the other hand, US high unemployment is not a surprise. In fact, economists last year have already predicted that high unemployment could continue until end of 2010. Employment growth had not been a smooth one during the last 2 recessions, this recession couldn't have been much different either. So, what's the big hoo-haa on US high unemployment in the media?

There's a lot of liquidity in the system. What are investors going to do with all these money? Put it in the banks with almost zero interest? Perhaps moving back into equities should be a good idea after all.

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