China stocks down 50% but still outperforming USA over last 10 years
December 18, 2008
– Comments (3) |
RELATED TICKERS: EUM
So the logic goes since China's stock market is down 50% it can't fall any further. That is not really sound logic though is it.
If I were to show you a company that had low profit margins and high fixed cost and then tell you that production volumes were going to fall 10-20%.
Then what if I told you the 10% drop in production volumes would mean the company fell from profitability to breakeven and at a 20% drop in volumes the company was a money loser.
What P/E ratio would you use for this obviously cyclical company?
What if I said this "company" were an entire country called China?
What if I told you that China's stock market is about where it was in 2005 when it was growing rapidly.
Now how about this what if I also told you that this country (China) had a stock market that was still outperforming the USA stock market by 70% over the last 10 years.... YES CHINA IS OUTPERFORMING THE USA BY ~70% over the last 10 years.
Now what if I told you that during the last recession China's stock market fell below the U.S. stock market?
Would you still think that Chinese stocks couldn't fall further ?
Here's a 25 year chart... sorry couldn't post the 10 year chart:
CHINA IS NOT AN EASY SHORT HERE
I'm not saying now is the best time to short China... frankly the Chinese stock market has the best looking chart of any market... it could in fact be bottoming ( I doubt it ), but still shorting China is risky even if it is right.
LEVERAGED ETF'S SHORTING EMERGING MARKETS ARE DANGEROUS - EUM IS SAFER.
In the past I've shorted the emerging market with ultra (leveraged ETFS) like EEV and FXP... I would not do that again... 2x ETFs are breaking down because they depend on expensive options premiums which kill returns over the long term... so if you must short emerging markets go with the EUM.
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