Profit From the Chinese Stock Market Rout – Buy the Asian Tigers


Once again the Chinese market is in the eye of the storm amid weak data. Of course, the fact that the deadline for the short selling ban is just days away wasn’t exactly helpful.

china stock marketThe Shanghai Index opened 2016 with a massive selloff of 6.8%, but it could have been worse. What “saved” the day was a circuit breaker which paused all trading activity and brought the panic to a halt.

For those who are optimistic long-term and expect China to weather the storm, this might be the perfect time to buy Asian stocks cheap.

The question is, is that really the case here and now? It certainly might be, but rather than buying the Chinese stock market, “Asian Tigers” could be a much better alternative.

The Chinese Stock Market Is Broken

China is in the midst of a major transition. It is slowly moving from a manufacturing-based economy to a services-based economy, much like the U.S. The problem is that the road to transition must first pass through the path of reforms. That’s where China tends to miss the turns, especially when it comes to regulation and transparency.

The Chinese stock market is essentially micromanaged by the government via buying stocks, banning directors from selling their own stock or barring big corporations from selling their holdings. Together, those measures are intended to maneuver and regulate the Chinese stock market. If that sounds familiar, it’s because it is very much akin to micromanagement of the Yuan.

The problem this creates for value investors is clear: Who knows if, at the moment of truth, you really could sell your holdings? Who knows where the floor for the Chinese stock market really lies under such conditions?

It’s apparent that in a heavily manipulated stock market it would be risky to dip your toes. But there is a solution — buy the “Asian Tigers” Taiwan and Singapore.

Asian Tiger Stocks

Now, that’s not to say that the two Asian Tigers stock markets, Singapore and Taiwan, don’t harbor an inherent risk from China — it’s not possible to expose yourself to the China story without some modicum of risk. Unlike the Chinese stock market, neither the Singaporean or Taiwanese stock market is manipulated and held artificially high.

Both economies are significantly smaller than China and neither are experiencing a transition in economic models. Both are considered among the most transparent and well-regulated markets.

In fact, since neither stock markets are held artificially high they trade much lower than their Chinese peers. Let’s compare the iShares China Large-Cap ETF (FXI) valuation to the iShares MSCI Singapore ETF (EWS) and the iShares MSCI Taiwan ETF (EWT). In terms of price-earnings it is evident that both markets are cheaper and offer more upside.

Chinese stock market
Click to Enlarge
Source: ishares

As can be seen in the chart, this is especially true in the case of Singapore. The respective exchange-traded fund, the iShares MSCI Singapore ETF, traded at a mere 1.2 times book value and a 11 times earnings.

Since both the EWS ETF and EWT ETF trade at low multiples the chances are that both will bottom out before Chinese equities do.

Moreover, each will respond well to any positive news from China while having much more transparency.

For those hunting for a quality bargain, the EWS and EWT ETFs could be the answer. It could allow you to buy exposure to China while remaining in the action for the long haul.

As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.

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