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Are China Plays Overhyped?

By Dr. Steve Sjuggerud
Thursday, March 30, 2006

My phone was ringing off the hook...

I was a broker specializing in international stocks and bonds at the time... but I should have just said “Asian stock guy,” as all anyone wanted were Asian stocks.

It was late 1993, and the China hype was in full swing. It’s rare for a broker’s phone to ring all day with unsolicited buy orders, but that’s what was going on back then.

I should have recognized it for what it was... a bubble in full swing. But I was too new to the game. It seemed the China story was the real thing... that China was going to take over the world.

Back then, it seemed like Hong Kong stocks were going up every day... and not by small amounts. The most common request was for shares of Hopewell Holdings, as Hopewell had a variety of projects in China.

I think it was January 1994 when it all fell apart... The market went from going up nearly every day to going down nearly every day. It was terrible. Brokers were soon hanging their heads, muttering about “Hopeless” Holdings. Hopewell shares fell dramatically, in no time, as the chart shows:

Hopewell Holdings stock price (in HK$) 

Since then, China-related stocks have been a terrible investment. As the chart shows, Hopewell is still about 50% below it’s all-time highs in 1993. It’s not an isolated case.

You can see that Hopewell shares also had a major bust in 1997, when the Asian crisis hit. You can also see that, since about 2003, the stock has been in a strong bull run, as the China story has kicked in once again.

The China boom story today is the same story we heard in 1993. So are we headed for a 1994 style bust?

Hardly... Why? Because Hong Kong stocks are nowhere near “bust” levels yet...

Today, we have plenty of history to size up. Looking over history, Hong Kong stocks are nowhere near the valuation levels they usually get when they’re ready to bust. Let me explain:

Hong Kong stocks have traditionally been the “gateway” to China. Many of the stocks in the Hang Seng Index (Hong Kong’s benchmark stock index) are direct China plays.

Looking over history, some patterns emerge. For example, when stocks in Hong Kong are trading at ultra-high P/E ratios (say, above 20), it’s been a great indicator to get ready to sell in Hong Kong. And when the P/E ratio is below 10, you should be getting ready to buy.

The important thing to take away from these charts is this: Hong Kong is not overvalued. It’s not even close. So there’s still plenty more room to run.

What we have is a market in an uptrend that isn’t overvalued yet. We haven’t reached the “China frenzy” stage yet, like we did in 1993.

If you bought today, you wouldn’t be buying at the bottom, of course. But in a world where there are very few cheap assets, China plays are relatively attractive. There’s still some relative value there.

There are also some potential upside kickers too, as my friend and colleague Jeff Clark has recently uncovered.

Yes, there’s been a lot of China hype. But based on history, the peak in hype is still a ways away...

Good investing,


Market Notes


Saying a boring timberland stock has the potential to make a quick 50% gain sounds a little crazy…

But that’s exactly what Steve said in the February 2004 issue of True Wealthwhile recommending timber REIT Rayonier (RYN) as the world’s best play on timber.

Back then, Rayonier was trading at a nearly 50% discount to a conservative estimate of its underlying timberland… while paying out a big dividend. As Steve wrote:

We'll collect 6% a year in dividends on our trees... all while we wait for the company discount to disappear, which could be as much as a 50% capital gain for us in timber.

True Wealth readers nailed it. With dividends and capital gains, Rayonier has returned over 90% since the recommendation… clobbering the returns made in stocks.

Are Trees Better Than Stocks? Rayonier since 2004:

-Brian Hunt

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