Now is the time to INVEST IN CHINA 🇨🇳
There are two big mergers to talk about today: Tiffany & Co. $TIF to be acquired by LVMH $MC.PA in an all cash transaction at $135/share. TD Ameritrade $AMTD to be acquired by Charles Schwab $SCHW in all all stock transaction. Is there any arbitrage opportunities? There could be, I'm writing two articles on the respective transactions and we will talk about them some other today. Let's have a look at the market today. The $SPX500 opens about half a percent higher with Apple $AAPL and Facebook $FB up by nearly 1% each. I've taken the opportunity to take some profits from these investments. I've reinvested all the profits in Fitbit $FIT which is an arbitrage play. Our best performing stock today is Diageo $DGE.L which is up by 1.5%.
Now is the time to INVEST IN CHINA 🇨🇳
Ray Dalio and Charlie Munger are very bullish about China despite the fact that Chinese stocks $China50 are not doing great. The Chinese economy has slowed down in recent years because of trade war and is now growing at only 6% per year. This is a slowdown in Chinese terms. The political unrest and recession in Hong Kong caused a bear market in the Hong Kong and consequently triggering a selloff of Chinese stocks being traded there.
The last 10 years have been the best since 1970 for the S&P500 $SPX500 and we should not be expecting the next 10 years to be the same. US stocks have an average PE ratio of 21 while Chinese stocks have an average PE ratio of 10.1, hence an earnings yield of 9.8%. Sooner or later, there's going to be a recession in the US. This is the first argument for investing in China, a country with low correlation with the rest of the world. China is a world in itself. They don't use companies such as Facebook $FB or Google $GOOG . Even if we ignore the PE ratio, we will see that the CAPE ratio is low. It is because big institutional investors have not started investing in China yet. Only 33% of investments in China come from institutions and out of these only 1% is foreign.
We should, of course, understand the risks of investing in China. China is a socialist dictatorship but they are becoming more and more capitalist. China is a state capitalist country. China has been a dictatorship for 5000 years and the country has more or less been successful. China is one of the rare dictatorships that works. It is because of the system that they have. In the West, our system is based on Judeo-Christian morality and Greco-Roman philosophy which gives much importance to the individual. In China, Confucianism and Buddhism are the working systems and gives much importance to the family and collectivism. In China, people see the state as a family and the government as the head of this family and power originates from the top. It is different and risky but risk is everywhere. There is rising socialism in the US, Brexit in the UK, Negative interest rates in Europe.
To mitigate the risks, you should understand the Chinese markets. Most people in China are now only getting out of poverty. In the West, we have phones, laptops, tablets, etc. In China, the smartphone is the sole device most people will have. That's the advantage Apple $AAPL was able to take. Most people access the internet through data and not Wifi. That's why the government is investing so much in 5G. China doesn't have oil $OIL and consequently likes EV. But the average Chinese person cannot afford a Tesla $TSLA and that's why companies such as BYD $01211.HK are winning. Right now for China, cheap electric vehicles are more important than autonomous vehicles.
The best way to look at the Chinese market is to look at companies on the iShares MSCI China ETF $MCHI which has over 400 companies in it. We will look at all these companies to find the right ones to invest in. Most people when they think of investing in China, they think of investing in companies such as Alibaba $BABA , Tencent $0700.HK or Baidu $BIDU . These are big companies and there's more money to be made from smaller companies. 20% of the Chinese population doesn't have a bank account. We should look at Chinese banks. Most people in China doesn't have insurance. We should look at insurance. China wants to be a superpower. We should look at defence and aeronautics. We should not rush. China is not going anywhere. Take your time to understand China before making any investment.
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