Don’t Let the Short-sightedness Turn you Away from this Emerging Market

by Kris Sayce

Your editor has worn glasses for as long as we can remember.

It’s been at least 30 years.

You see, we’re short sighted.

Without specs, things are just a blur.

And yet despite being visually challenged, there are some things we can see clear as day. We can see them with or without the aid of glasses.

This thing in particular is so clear it surprises us that others with 20/20 vision can’t seem to see it at all…

It really is funny.

We don’t know if the market is blind or whether it just has severe memory loss.

Every so often a bureaucracy somewhere releases a bunch of data and it seems to catch the market completely unawares.

Take this report in the Financial Times yesterday:

‘Global stocks climbed after a surprise rebound in China’s services sector as European markets extended strong momentum from Asia with London’s FTSE 100 hitting a 14-year high.

‘The biggest surge for Hong Kong equities in nearly a year followed two strong surveys out of China, greeted warmly by investors after lacklustre manufacturing figures out of Beijing on Monday had cast a cautious tone over the start of September trading.’

Really? How can a rising services sector in China surprise anyone? This is a subject emerging markets analyst Ken Wangdong has covered in detail. He did so in the most recent issue ofNew Frontier Investor.

To understand why China’s rising services sector shouldn’t be a surprise, you only have to read Ken’s analysis on the urbanisation of China. China’s population is barely 50% urbanised. Tens of millions of people are moving to, or trying to move to, the major cities every year.

Of course China’s services sector will grow.

What’s good for Hong Kong is good for Australia

Not only that, but for the past five years even the mainstream has banged on about China moving towards a services led economy.

So goodness only knows why it surprised them that China’s services sector has risen. But it did.

That’s why Hong Kong’s Hang Seng index gained 2.3%.

The Hang Seng is now at the highest point of the year so far.

In fact, the Hang Seng index is today at its highest since 2008. And like the Aussie blue-chip index, the Hang Seng still has some way to go before it hits the 2007 high.

The Hang Seng is an important index for the Australian share market. Over the years there has been a strong correlation between its performance and the performance of the Aussie S&P/ASX 200 index.

You can see this on the chart below:

The blue line is the Hang Seng. The red line is the Aussie index.

You can see the correlation. Over the past five years both indices are up almost 26%. There’s no doubt that what’s good news for Hong Kong is good news for Australia.

The funny thing is, while Hong Kong’s index has done pretty well over the past five years, China’s market has performed terribly.

Buy while China is down

It’s not often that we print two charts in the same issue of Money Morning, but today we’ll make an exception.

The following chart is the same as the one above, with one change. We’ve included China’s CSI 300 index — the yellow line:

While the Aussie and Hong Kong markets have done pretty well (but not great), China’s markethas been terrible. The index is down 21% over the past five years.

It would be an even worse performance if it weren’t for the recent rebound. For much of this year, China’s index had been down 30% from where it was five years ago.

But to our mind, that’s what made China, and other emerging markets such an exciting opportunity. When a market is taking a beating from pillar to post, that’s exactly when you want to buy.

That’s why we brought on emerging markets analyst Ken Wangdong to head up the New Frontier Investor advisory service.

The right sectors to buy in an emerging market

The New Frontier Investor service has been up and running for nearly two months. Time flies.

In that time Ken has made his fair share of interesting and also slightly controversial calls.

Perhaps the two most controversial calls were Ken’s banking of the iron ore sector. With the iron ore price hitting a five-year low overnight, it’s certainly not a punt for the fainthearted.

His other controversial call was to recommend investors buy into one of China’s fastest growing banks. That’s right, a Chinese bank. It’s hard to pick up a financial newspaper without reading about the fears of a banking collapse and China’s ‘shadow banking’ system.

And yet, as Ken explained, the so-called shadow banking system is just how financing has traditionally worked in China. Remember, until recently, China didn’t have the type of banking system that most in the West take for granted.

But not all of Ken’s analysis has been so controversial. Other companies involved in the car industry, building and land, railways, and energy sector are exactly the kind of sectors you would expect to do well in an emerging market.

In fact, that’s the reason we chose them. We looked at the industries that did best during the period of American supremacy in the early 20th century. These are the sectors that boomed more than others.

The press today insists on focusing on short term issues such as falling iron ore prices, and whether China’s services sector may grow or contract by one-tenth of one percent.

We on the other hand prefer to look at the bigger picture. It’s there for all to see if they choose to. Unfortunately, it seems that most just can’t see it.

Read the rest of this article at Money Morning