Why Chinese Stocks Look Like Bargains
NEW YORK ( TheStreet ) -- With investors fretting about emerging markets, Chinese stocks have languished. During the past year, China mutual funds returned 5.4%, compared to 21.9% for the S&P 500, according to Morningstar.
Now some portfolio managers argue the Chinese shares are at bargain levels. Anthony Cragg, portfolio manager of Wells Fargo Advantage Asia Pacific (WFAAX), says the Chinese market's price-earnings multiple has dipped to 9 from the high above 20 that was recorded before the financial crisis. "China has gone from being the most expensive large emerging market to one of the very cheapest," he says.
Investors have fled emerging markets because of fears about weakening currencies and deteriorating trade balances. But portfolio managers argue China has been unfairly tarred with problems that afflict other countries. While Turkey and Brazil suffer from weakening trade balances, China remains an export powerhouse with a huge trade surplus.
At a time when many governments worry about collapsing currencies, the Chinese regime has labored to insure that its renminbi appreciates only slowly. "Over the years, most emerging markets crises have been the result of currency problems," says Robert Bao, portfolio manager of Fidelity China Region (FHKCX). "But the Chinese currency is stable."
Make no mistake, the Chinese economy is slowing down. During the past decade, annual GDP growth rates sometimes exceeded 10% as the country raced to modernize. But now that China is the second-largest economy in the world, the growth rate has dipped to 7.7%. While many investors worry about the slowdown, bullish portfolio managers note that GDP growth is still among the fastest in the world. The managers argue the Chinese regime will continue stimulating the economy to maintain a healthy job market.
To obtain a dose of relatively steady Chinese stocks, consider Guinness Atkinson Asia Pacific Dividend (GAADX). Portfolio manager Edmund Harriss focuses on high-quality companies that have delivered reliable returns on investment for at least the past eight years. Holdings include blue-chips that have proven their ability to weather downturns.
The fund has 35% of its assets in China and Hong Kong. The cautious portfolio tends to outperform in downturns and lag in rallies. During the past five years, the fund returned 17.9% annually.
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