With the major U.S. indexes closing another week with a loss, many are wondering if the bottom is near and if it’s time to start buying again. I’ve been cautious about buying stocks since autumn. Back in November, I had my China Strategy members sell half-positions in several of our biggest winners because I wanted us to preserve our gains. We’ve been defensive ever since then, selling two more China stocks and beefing up our position in a tried-and-true hedge against the U.S. dollar. I also advised China Strategy members to keep 40% of their portfolios in cash.
Our capital preservation strategy has worked—the Chinese metals monopoly that we sold three months ago is down 32% since then. And the energy play that we sold at the same time has fallen 19%. In the same time period, our U.S. dollar hedge is up nearly 15%!
But no matter how disciplined an investor you are, having a significant cash position feels like a missed opportunity. The good news is that things are looking up for investors who are trying to capitalize on China stocks. I don’t think it’s safe to go out and invest all of your extra cash right now, but my indicators are telling me that the fundamentals of Chinese stocks are improving.
Aggressive rate cuts from central banks in both the U.S. and Hong Kong combined with a 30% correction in the past three months have brought high-quality China stocks back down to attractive levels again. In the past three months alone, the average P/E ratio of Chinese companies trading in Hong Kong has dropped from 28 down to 21.
Last year, China’s government increased interest rates six times in order to help curb inflation. But in the past few weeks, I’ve seen signs that the government will likely stop its rate hikes. The pause in rate increases will help ease money supply in China again. China’s government has also approved the creation of new mutual funds that will invest in Hong Kong-listed stocks. The new mutual funds will funnel more liquidity from Mainland China to Hong Kong. Increased money flow into Hong Kong will boost Hong Kong-listed shares of Chinese companies, that back the New York-traded ADRs that I recommend in China Strategy. This is a story that we’ve been following in China Strategyfor almost a year now, and I expect it to continue paying off for smart investors who get in front of those companies that will benefit the most.
To top things off, I’m expecting our China Strategy companies to bounce because they’re continuing to grow their earnings at an average of 20%–25% a year. This is a sharp contrast to what’s happening here in the United States. According to Bloomberg, overall fourth-quarter earnings from the S&P 500 have fallen almost 20% on average, with 367 companies having released results so far. Earnings are down mainly because financial giants like Merrill Lynch and Citigroup have posted record losses. So as you can see, high-quality Chinese companies offer U.S. investors a good alternative to sluggish stocks here at home.
What to Do Now?
So how can we take advantage of these recent favorable developments in China? I believe the safest strategy is to put 10% of your cash to work in one of our China Strategycompanies that has been oversold.
This company is a well-run monopoly in its industry, and none of its competitors has even come close to its success. Here’s what I mean: Our company added a record 6.6 million customers in December and a total of 68.1 million in 2007, increasing its total customer base to 369.3 million. Its biggest rival gained just 1.4 million customers in December for a total of 160.3 million overall. As you can see, our company is the clear and undisputed winner in its field.
It also has shares traded in Hong Kong, which will benefit from the new Hong Kong-traded mutual funds that the Chinese government has authorized. This company is a household name in China, and investors will snap up funds that include shares of this big Chinese blue-chip stock. When this happens, our U.S. shares will rally.
Join China Strategy risk-free today, and I’ll bring you the latest news and developments from China. I’ll tell you how to profit from this extraordinary opportunity and which companies and industries to avoid. Be among the first to know which companies to buy and when by joining China Strategy today. Don’t miss out!
