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Wow that didn't take long / Why I believe that Chinese stocks will outperform in 2009

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August 25, 2008 – Comments (5) | RELATED TICKERS: GM , F

Last week I posted a "Fearless Forecast" with my top tem predictions for 2009 (see post: The Fearless Forecast: 10 Stone Cold Lead Pipe Locks for 2009).  At the time I didn't post any explanations of my them, but I plan on going into greater depth on each one in future posts. 

On Friday I posted a detailed explanation on why I think that General Motors will be able to survive without having to file for bankruptcy (see post: How I determined that GM will survive).  Towards the end of my explanation, I said:

"The one wild card here is the U.S. government.  The government set a precedent by stepping in and providing Chrysler with $1.5 billion dollars in loans to help it avoid bankruptcy back in 1979.  I don’t see why they wouldn’t do the same thing for GM if it came down to that." 

Well it certainly didn't take long for this portion of the prediction to come true.  On Saturday, the Wall Street Journal published a story titled "Big Three Auto Makers Seek More Help From Washington" (link) which describes how the traditional "Big 3" (for lack of a better nickname) automakers are seeking billions of dollars in loans from the government.

Politicians already approved $25 billion in federal loans to these companies as part of an energy bill that was passed in 2007.  Unfortunately, a General Motors spokesperson was recently quoted as saying that they will need "well north" of that.  While no official numbers have been published yet, many are estimating that the companies are now seeking from $40 to $50 billion in loans. 

I have seen a number of stories, including one published by Reuters or some wire service on Friday, stating that the government is unlikely to provide loans to the automakers.  I don't believe that could be farther from the truth.  The auto manufacturers are going to spin this as a way for them to stay afloat so that they can design and manufacture much more fuel-efficient vehicles right here in the United States.  They along with politicians will make the loans look like a way to protect American jobs at a time that unemployment is rising and a way to help further our country's efforts to become less dependent on foreign oil. 

The rapid burning of their cash reserves will cause these automakers to need this cash in the near future, but that's probably not the only reason why they are trying to secure these loans before the end of 2008.  We are in an election year and neither the Democrats nor the Republicans want to be seen as the party that forced a huge U.S. company into bankruptcy, causing the loss of even more jobs for Americans and even more business to foreign manufacturers. 

No official statement has been made about whether larger loan packages for automakers will be approved, but I personally would be shocked if they weren't.  That's not to say that I agree that the government should loan them money.  If they market worked properly, the worst-run of the three...Chrysler...would be allowed to die.  

As someone who works in the industry and would likely benefit if automakers had more money, it is difficult for me to look at this situation from an unbiased perspective.  For the most part, I am of the opinion that less is more when it comes to government and that it is nuts for them to loan our hard earned tax dollars to any poorly-managed company (which is precisely what GM, Ford, and Chrysler are), but since they are giving free money to and bailing out so many other companies, why shouldn't the automakers benefit as well.  Hey free money for everyone.  Make sure to say "Hi" to the U.S. dollar on the way back down.

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Prediction number three of my Fearless Forecast was "Chinese stocks on average will significantly outperform U.S. stocks" in 2009.  To me, this one is another slam dunk. 

While the U.S. is bogged down with all sorts of credit and housing problems, slowing consumer spending, and rising unemployment the Chinese government is going to do everything in its power to keep its stock market from falling even further. 

Chinese officials recently talked about  "stabilizing capital markets" by pumping an additional 400 billion yuan ($58 billion!) into their economy.  This money is on top of the estimated $70 billion that China will have to spend to repair the damage caused by its recent earthquakes.

I would not be surprised if China began to ease its monetary policy as well.  An article on Bloomberg recently quoted a number of analysts who expect this to happen (see article: China's Economy Slows on Weaker Production, Olympics Closures).

Yes, exports from China will slow if the economies of the U.S., Western Europe, and Japan are in rough shape, but domestic consumption in China is rising rapily and it will make up for some of the decline in exports.

Add the government rebuilding efforts, increased government spending, looser monetary policy, the restarting of the factories that were idled during the Olympics (to cut down on pollution), and China's increasing domestic consumption together and you have the recipe for a stock market that will easily outperform the U.S. market (not to mention significant consumption of natural resources like oil).

Deej

5 Comments – Post Your Own

#1) On August 25, 2008 at 2:57 PM, lquadland10 (< 20) wrote:

You forget to factor in that now China is charging USA companies a 25% capitol gains tax.

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#2) On August 25, 2008 at 3:17 PM, Bupp (28.57) wrote:

Deej, I agree with you on this call 100%, check out my blog post August 15th.

 http://caps.fool.com/Blogs/ViewPost.aspx?bpid=79314&t=01008169896868001586

Look for infrastructure and telecom companies to lead the way. 

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#3) On August 26, 2008 at 2:03 AM, TheGarcipian (34.23) wrote:

Deej,

Excellent post. I whole-heartedly agree. I was thinking along the same lines last month, but couldn't quite put it in such precise words. Thanks for doing so. I am staying long in my Chinese, oil and copper stocks. I'm am also hoping shipping will bounce back, primarily in service to China again.

Cheers,
--Gar

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#4) On August 26, 2008 at 5:57 AM, TMFDeej (99.26) wrote:

Thanks Gar.  I have heard a couple of people talk about how they believe that dry bulk shipping will rebound towards the end of the year as a result of a resurgence in China.

Deej 

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#5) On August 26, 2008 at 1:54 PM, XMFSinchiruna (26.96) wrote:

Go Diana!  :)

Go Eagle!  :)

My Big Fat Greek Shipper

I agree... drybulk will be big... but do casreful DD to be sure your pick has the cash flow necessary to grow its fleet in a timely manner.

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