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You Get What You Pay for Here...and Then Some!
Thursday, October 18, 2007 - Vol. 9, No. 248
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In This Emerging Market, You Get What You Pay For, and Then Some!
Today’s comment is by Mike Burnick, our Senior Editor, Global Markets Analyst and editor of Global Market Investor.
Dear A-Letter Reader,
If you’ve been following my blog, you already know the third-quarter profit reporting season has gotten off to a disappointing start for the S&P 500.
On Monday, Citigroup announced a 57% slide in profits for the third quarter. Wow! Citigroup joins a growing list of financial shares reporting tens of billions in losses and write-offs this quarter thanks to the sub-prime credit crunch that began in July.
In fact, by some estimates, S&P 500 profits may decline in aggregate this period for the first time since 2002. Standard & Poor’s is forecasting a 1% fall in overall profits from this time last year.
However the news isn’t all bad this quarter in all corners of the globe. There’s one red hot market half a world away that’s set to report a 40% surge in profits this year: It’s Hong Kong!
H-Shares Set to Shoot the Lights Out...Again!
Lately, I have seen a fair share of media commentary about how China is in a “bubble.” As the story goes, China has gone up far too much already. It’s “way overvalued.” Well, yes and no.
You see, there are really two Chinas from an investment perspective. First, there’s the over-hyped, overpriced and rigged game known as China’s mainland A-share markets. Then there’s the Hong Kong-listed H-share market of Chinese mainland stocks.
There’s no question the A-share market is in “bubble-land” after more than tripling in the past year alone. That’s a run up in price reminiscent of the “dot-com” era in U.S. tech stocks circa 1999. Of course, many of those dot-com’s are now dot-gone, so be careful with mainland Chinese shares!
Of course most investors outside of China can’t get easy access to the A-share market anyway. And that’s a good thing, since the Hong Kong-listed H-shares are still a much better bargain anyway. In fact, Hong Kong still looks very attractive today.
While not the bargain it was six months or a year ago, Hong Kong is still drawing investment money from mainland Chinese investors. Global investors are also sending their investment assets to Hong Kong, because it’s a cheaper way to buy into the booming mainland markets.
Despite Big Gains, Hong Kong is Still a Bargain Compared to China
Increasingly Hong Kong has become a destination exchange for Chinese mainland firms to list their shares. By listing in HK, these companies can more easily raise capital from global investors. In fact, the market value of Chinese mainland stocks now accounts for 53% of Hong Kong’s total market value. That’s up from just 16% when Great Britain turned over its former colony to Beijing in 1999.
Even after a 40%-plus rally since mid-August, Hong Kong’s main benchmark, the Hang Seng Index, trades at just 19 times earnings. Compare that to a P/E ratio of about 51 times for the Shanghai Composite – and more than 70 for Shenzhen – that’s quite a valuation discount in favor of Hong Kong shares.
In fact, according to Bloomberg, “Of the 45 Chinese companies with equities traded both at home, and in Hong Kong, the so-called H shares are about 34% cheaper than their yuan-denominated A shares.”
Take China Life for example. The leading insurer in mainland China is valued at 74 times earnings in Shanghai. But in Hong Kong, China Life’s H-shares have a P/E of 40.5. In other words, the H-shares would have to rally 82% to close this valuation gap.
Hong Kong Enjoys Growing Cash Flows from Mainland Investors
Earlier this year, Beijing began to loosen restrictions on where Chinese citizens could invest their estimated US$2.3 trillion in household savings. Recently, the government announced a pilot program that allows retail investors to trade directly in Hong Kong-listed shares for the first time.
As a result, JP Morgan estimates US$60 billion may flow into Hong Kong in the next year. It looks to me like this great-wall of Chinese retail money is already finding its way south.
In spite of the major move already this year, Hong Kong can still be considered “undervalued” by some measures. While its P/E ratio of 19 has moved up over the past few years, it’s still far cheaper than Shanghai’s valuation. It’s also in line with the S&P 500’s P/E of 18.
Hong Kong Shares Offer Much Stronger Growth Potential to Boot
If you take a look at cash flow, then Hong Kong looks like an even bigger bargain. The Hang Seng Index trades at just 5.2 times cash flow, compared with 12 times for the S&P 500 and 11.5 times for the MSCI Asia-Pacific Index, according to Bloomberg.
H-share company profits are also forecast to surge 40% higher this year, compared to 22% earnings growth for emerging markets overall. And if you stick with the S&P 500, you’ll be lucky to see profits grow just 7% or so this year. You get what you pay for!
Beijing will have its moment in the global spotlight during next year’s Olympic games. Shanghai is still China’s principle trading hub.
But Hong Kong is swiftly becoming the financial gateway to mainland China – as well as mainland China’s gateway to a wider world of more attractive investment choices.
MIKE BURNICK, Senior Editor & Global Markets Analyst
P.S. I have been bullish on China, and especially Hong Kong, for quite sometime. And have recommended a couple of excellent ways to play the upside appreciation I still expect for this undervalued market. One of these recommendations has already soared more than 70% in value just since May! But there’s still time to take advantage of this, and other red hot emerging profit trends in global markets: Subscribe to my signature investment research service Global Market Investor to learn more. today, and get all the details!
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| Offshore |
American Police State Part II
Yesterday, I discussed how the FBI and military spies on ordinary, law-abiding Americans just like you.
As part of the Freedom of Information lawsuit, the American Civil Liberties Union (ACLU) produced documents to prove this fact. According to their information, the FBI has issued enough national security letters since October 2001 to fill five pages of logs.
There’s no way to tell exactly why the FBI issued all these national security letters. You can’t tell because they blacked out certain sections of the log pages, supposedly for “security reasons.” The government then refused to provide further information on how the letters were used.
In 2007, then U.S. Attorney General Alberto Gonzalez told the newly Democrat-controlled U.S. Senate Judiciary Committee he knew of no instances where the letters had been abused under the PATRIOT Act.
Later FBI Director Robert Mueller admitted that there had been thousands of times when FBI agents have misused the letters. But he passed it off as a misunderstanding, rather then willful violation of the law.
The truth is that the government really doesn’t need these enormous police powers.
Under the Constitution and other U.S. laws, the government already has the authority to investigate and prosecute anyone. The government just needs to have probable cause that a person has committed, or is planning to commit, a crime.
The government also has the authority to put individuals under surveillance, whether or not that person is suspected of any crime. The government just needs probable cause to believe that individual works as a spy or represents a foreign power.
But until now, the government had to obtain a search warrant based on probable cause for each case.
While destroying our liberty and privacy, these broad new police powers aren’t likely to increase our national security or safety. But they definitely have destroyed our rights under the U.S. Constitution.
If you still needed a good argument to convince you to move some of your cash, assets and business records offshore, out of reach of the FBI, this is it.
BOB BAUMAN, Legal Counsel
P.S. The PATRIOT Act has stolen more of your freedoms than anyone cares to say. Click here to find out how this travesty of a law has affected your life – whether you know it yet or not.
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Privacy & Rights
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Why You Would Want an EU Passport
A passport from a European Union country is one of the most desirable travel documents you can possess.
Most EU members have extensive network of countries to which passport holders can travel without a visa. Equally important, a person holding a passport from one EU country can generally travel to, reside in and work in another EU country, with few formalities necessary.
Unfortunately, few shortcuts are available to obtain a passport from an EU country. Almost without exception, you must apply for residence in your selected EU country, and live there for an extended period – generally 5-10 years – before you're eligible to apply for passport and citizenship.
It certain cases, you may qualify for citizenship in an EU country by virtue of your ancestry, marital status or residence in a dependency of that country.
For instance, if you can prove that you have at least one Irish-born grandparent, you can apply for Irish citizenship and passport. There may also be a shortened period of residence to qualify for citizenship if you're married to a citizen of an EU country.
Finally, if you're a resident of a dependency of an EU country, it may be possible to make expedited application for citizenship in the parent country.
Since it's difficult to obtain citizenship from an EU country, it's not surprising that some shady promoters offer fraudulent shortcuts through this process. Tune in tomorrow and I’ll tell you about one such scam. Or read my blog, to get the full story right now.
MARK NESTMANN, Privacy Expert & President,
The Nestmann Group
www.nestmann.com
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