NEW YORK (TheStreet) -- There was a time when many thought that China's growth and upward momentum was fueled by speculators and government spending, and now believe that Chinese stock prices and real estate are over inflated. It appears they are wrong.
China's stock market is up by more than 60% since last November, boasting a price-to-earnings ratio of 24. To investors accustomed to investing in the U.S., this may seem high, but it is a far cry from the eye-popping price-to-earnings ratio of 70 seen during China's previous bubble in 2006-2007 and much lower than the nation's long-term average of 37.
In regards to real estate, volume of property sales has surged by 85% over the past year and prices of new apartments in Shanghai have risen by nearly 30%. Additionally, average Chinese home prices are nine times average annual household income.
Some believe that prices have been pumped up due to imprudent bank lending, which is a red flag. However, when one looks at the sector in more detail, average nationwide house prices have risen by 2% over the past year, and in relation to income, average house prices in China have fallen slightly over the past decade. As for prices, they are rising nowhere near as fast as they did during the previous boom in 2004-2007.
GDP for the nation is expected to be close to 9% for the first three quarters of the year, as compared to contraction for its competing nations. In the short-term, it appears that China is safe from bubble territory. The last thing that makes the Asian nation even more attractive than before is that its growth seems to be driven by a rebound in construction and private-sector investment, as opposed to state spending funded by the government.
Some equities that have followed China's trend are the following:
iShares FTSE/Xinhua 25 Index
, which is up 86% from a March low of $22.80 to close at $42.45 on Monday.
SPDR S&P China
, which closed at $69.40 on Monday, a 92% increase from a March low of $36.21.
When investing in equities, it is important to remember the inherent risks involved. To help mitigate these risks, an exit strategy is important. According to the latest data from
, an upward trend in the previously mentioned ETFs could possibly come to an end at the following price points: FXI at $41.51 and GXC at $65.27. These price point change on a daily basis as the markets fluctuate. Updated data can be found at www.SmartStops.net.
Written By Kevin Grewal in Laguna Niguel, Calif.
At the time this article was written, Grewal held no positions in the mentioned equities.
Kevin Grewal is an editorial director and analyst at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, he was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.