By Jeff Opdyke, editor, Emerging Market Strategist
Dear Sovereign Investor,
The best profits in the stock market routinely come to those who buy when investors are disenchanted with a stock or a market.
And that’s China today…
Yet now is actually the best time to be a buyer of high-quality Chinese stocks, particularly those that serve the growing consumer sector. Here’s why…
Cheap Stocks Litter the Hong Kong Exchange
Today, China is largely in the aversion camp. Investors have been rushing out of Chinese stocks because Chinese leaders have raised interest rates a few times recently to ward off inflation, particularly food inflation. Investors worry that higher interest rates will crimp corporate profits and impale consumers’ ability to spend.
To some degree that’s a valid concern, at least in the short term.
But investing is about finding companies that you want to own for longer than a few weeks. These are the companies with strong, underlying fundamentals and are priced fairly.
Those kinds of stocks are scattered around the Hong Kong Stock Exchange today – the primary exchange for high-quality Chinese companies. And you want to own them now precisely because they’re underappreciated.
If you look back to early 2009, some of the best names in Chinese consumer stocks plunged when America’s debt crisis undermined stock markets globally.
Fundamentally there was nothing wrong with the companies, and America’s woes were not going to drastically reshape the Chinese consumer over the long term.
But investors did not care. They fled – and left in their wake some amazing values.
Consider Mengniu Dairies, China’s leading milkman…
A Case Study in Milk
Mengniu is a perfect example of the kind of stock you want to own as China builds a consumer culture, and as increasing numbers of Chinese can afford better quality foods, like dairy.
Dairy, in fact, is one of the fastest growing food groups in China, with compounded annual growth in the 20% range. And Mengniu’s brand is all over the place … the company even sponsored China’s first astronaut.
I’d been watching the stock since about 2007, when it was trading in the high-20s. When America flooded the world with economic fear in 2008, Mengniu dived to less than HK$7 a share (US$0.90).
At that price, investors were valuing the company’s stock at ridiculously cheap levels. Long-time China investors who knew the story of the company and who understood the market rushed to buy shares even as the rest of the world rushed to dump them.
Were wealthier Chinese suddenly going to stop drinking milk because American banks can’t properly gauge mortgage risk?
Not likely. And, lo and behold, they didn’t.
They kept right on consuming increasing quantities of milk, and one year later Mengniu’s shares were back in the mid-20s.
This Isn’t the End of the China Story
Yes, the markets today are worried about Chinese inflation. That, in turn, has undermined stock prices. But all of that is only a byproduct of short-term thinking.
Smart investors recognize that the trends driving consumer-oriented companies like Mengniu Dairies have not suddenly vanished. Instead, they see this as an opportunity to start accumulating long-term winners again at cheaper prices.
Rest assured China will get a handle on inflation. Moreover, food-price spikes have a way of reversing fairly quickly.
So buy Chinese consumer stocks while they’re still cheap.
Until next time, keep a global view …
Editor, Emerging Market Strategist