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Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

China Stock Market SSEC Trend Forecast 2011

Forecasts / Chinese Stock Market Apr 15, 2011 - 04:22 PM GMT

By: Nadeem_Walayat

Forecasts

Best Financial Markets Analysis ArticleThis article is an excerpt form the NEW The Stocks Stealth Bull Market Update 2011 70 page ebook that is available for FREE Download. The Chinese fast growing economy with consistent annual growth rates of 10% per annum is on course towards becoming the worlds dominant economy over the next 10 - 15 years, with GDP per capita at just $6,000, China's economy retains the capacity to keep doubling in size several more times before growth rates seriously start to diminish, therefore despite the growth to date the economy still has a long way to go towards even reaching half the per capita income of that of the western economies.


The financial crisis had offered investors a great once in a life time buying opportunity to buy into China's growth story at less than SSEC 2000. Maybe we will get some more chances over the coming year though probably nowhere near the depths of what we saw during 2009, therefore the best strategy is to scale into China over a period of time as I mentioned as part of my bear market accumulation strategy way back in October 2008 (Stocks Bear Market Long-term Investing Strategy).

With an estimated $3 trillion of reserves and growing by some $400 billion per year, little debt and a very high savings rate of over 30%, China can afford to keep going on highly expansive inflationary stimulus spending sprees so as to buffer its economy from any future economic and financial crisis, whilst in the west each new stimulus will be financed by ever more debt that will have to serviced by means of interest payments in large part PAID to CHINA.

Chinas first growth phase was led by export growth that has been gradually feeding into domestic consumption growth which in turn is being followed by the financial growth phase. Which means as long as China does not make the same mistakes as western economies by putting a debt noose around its neck, then China remains a prime long-term investment destination.

The ultimate impact of the Chinese economic super power is that the world will increasingly turn Chinese, as more wealthy Chinese travel abroad so will tens of millions of wealthy Chinese choose to become expats living abroad, especially in the western english speaking world which will likely promote greater economic ties and economic dominance of China across the world as a new economic empire is born, therefore make room for the next big wave of human migration from east to west that will seek to buy up large tracts of the remaining means of production and probably be invited in by desperate government's eager for foreign investment to spark life into stagnating regions.

China Government Competent
Whilst no one in the west would want to live under a totalitarian one party state. However the Chinese government has shown itself to be fairly competent in managing the economy, far better than many western democratic government's which continues to surprise many people that look to the experience of the last communist giant, the Soviet Union which collapsed into hyperinflation. It could be said that being a totalitarian state enables decisions to be implemented far more quickly and similarly any mistakes made can be far more easily brushed under the carpet.

Whilst the western government's have been engaged in piling debt upon debt for consumption, the Chinese have been busy utilising hundreds of billions of dollars of stimulus spending to build up China's infrastructure by building new cities, roads and railways, all of which generates capacity for future economic growth.

China Blowing Bubbles
Yes strong economic growth and high liquidity i.e. bank lending is leading to bubbles that will burst such as in housing, but the Chinese fiscal position is such that the government can keep blowing bubbles as long as it continues to import foreign currency reserves that can be utilised to cushion the blows which therefore means that the post bubble crashes remain long-term buying opportunities, as the crash of the Chinese stock market to SSEC 1,600 in October 2008 proved.

China Exporting Inflation Abroad
As warned of in the Inflation Mega-Trend Ebook, China's fast growing and overheating economy is inevitably going to experience significant price inflation. However at the moment China actively intervenes to keep its currency pegged to the U.S. Dollar, that has contributed to an enormous trade imbalance with the U.S. resulting in huge currency reserves that are a natural boost to the Chinese currency were it not for the high level of currency market intervention.

As the inflation mega-trend unfolds and inflation has risen in China, then China can let the Yuan appreciate against the other debt ridden currencies over time which has the effect of exporting inflation abroad as the costs of imports into China falls. This will increasingly become the case as the size of the domestic consumer sector grows over the coming years which will feed higher inflation in western economies.

An appreciating Yuan will have the effect of boosting profits for foreign investors when converted back into their own depreciating currencies, especially as the Chinese government will increasingly seek to promote the Yuan as an alternative world reserve currency to an highly indebted US Dollar, where such a trend would significantly magnify profits from investments in China.

China to Drive Foreign Stock Markets Higher
China is drowning in a sea of dollars that it cannot sell as that would undermine its dollar currency peg objective. However China can achieve the same thing whilst at the same time reducing its risk to a depreciating dollar by investing in dollar assets such as stocks, ETF's and commodities. Therefore those that continue to seek a bear market in U.S. and other western stock markets fail to recognise the huge potential pool of investment funds that are expected to continue to flow into western and other emerging market stock markets over the coming decade and hence contributing towards driving the stocks stealth bull markets higher.

Though it is not necessary to know which stocks China is buying as it is obvious that a resources hungry China is clearly targeting the resources, and energy sectors, where stock buying would tend to lift the whole sector. China will also be seeking to invest in the large liquid stocks and ETF's with strong cash-flows and profit potentials which the stocks investment section seeks to illustrate.

China Intellectual Growth Problems
One possible fly in the ointment is future political stability, as so far the 'communist' in all but name one party state in China has been able to keep its peoples eyes focused on economic prosperity and not to stray into political activism, whether at some point in time a crunch point comes when a more wealthy educated people demand more openness and freedom of expression.

Another problem that follows on from the authoritarian government structure is that China's access to the information age is very limited, i.e. web searches are usually blocked and user access to the internet closely monitored. This implies that China is unlikely to replicate the global growth in the production of consumer durable goods on to the internet technologies, which will still largely remain something in the hands of the democratic relatively free English speaking world as long as they do not erode their own countries freedoms by means of the states misapplication of technology to prevent free thought.

Chinese 10 Year Stock Market Outlook
As stated in the Inflation Mega-Trend ebook - A sustained average growth rate for the Chinese economy over the next 10 years of 8% per annum implies a GDP compound advance of 115%. China's Price / Earnings ratio currently stands at approx 24, which whilst still high is down from the eye watering days of the bull market peak that had the P/E as high as 70. Still 25 is not historically cheap and therefore despite the high growth potential of the Chinese economy, this is expected to narrow over the coming decade towards an average of 18.

January 2010 - Therefore taking a P/E of 18, and GDP advance of 115% and applying this to the current SSEC level of 2990, this would therefore suggest a fair value for the Chinese Stock market of approx SSEC 9,200 in 10 years time. Off course the actual trend is expected to function as a consequence of speculative runs to over valuation and subsequent corrections into states of under valuation as we saw with the 2007 peak of 6,250, a stock market boom into a bubble in 10 years time could see the SSEC as high as 17,000 against the current price of 2,990.

The Chinese stock market doubled after the powerful rally off of the October 2008 low of 1664 to a high of 3,478. Subsequently the price action has been in a long extended trading range where most of the price action has been contained between 3,300 and 2,500, during which time the price / earnings ratio of the market has come down from a lofty 33 to a more acceptable 24.

Technically the market continues to mark time as it prepares to break out higher. It is difficult to say when the market will break higher, but as evidenced by the steadily falling P/E, an upside breakout is increasingly becoming more probable, which therefore means any further trading activity towards the bottom of the range represents further good long-term accumulation opportunities, especially as the impact of china currency appreciation is not reflected in the SSEC stock index performance.

Chart courtesy of StockCharts.com

In conclusion the China is a long-term buy, China remains one of my KEY investment destinations with an over-weight rating as by far the single greatest source for future world economic growth will be from China. Not only is the country swimming in cash but foreign investors will be ever eager to plow more of their own money into China. So I am firmly putting my money where my mouth is by remaining invested in China. Therefore I will let others worry about the potential black swans and stay scared of investing in China.

China Stocks Crash ?
2008 through to 2011 have shown us that the markets are extremely volatile, so yes the speculative Chinese stock market could crash, but as long as the fundamentals remain in place i.e. that the Chinese economy continues to grow strongly as it did throughout the recession then market crashes are excellent long-term buying opportunities. Think of it this way, instead of buying the market at 24X earnings a 33% stocks crash offers you the opportunity to buy the same market at X16 earnings. Just as the crash to below SSEC 2k presented a golden opportunity to buy China in 2008.

Foreign Investors Currency Advantage
Foreign investors should also take note of the strong currency advantage of investing in China, as the Yuan will eventually appreciate against all fiat currencies. This means that over 10 years investors in say sterling could see their returns increase by as much as a further 50%, as the current trade imbalances are not sustainable, i.e. last year (2010) China exported $365 billion to the U.S. whilst importing $92 billion, which should have resulted in a significant Yuan appreciation, instead of the 3% or so move during the past 12 months which strongly suggests intense currency market intervention to hold the peg to the dollar that will culminate in a series of rapid revaluations, thus driving the value of Chinese investments higher in currencies such as sterling and the dollar. Therefore foreign investors into China are effectively buying an inflation hedge on top of capital growth as a consequence of economic growth.

China ETF's
There are several liquid China ETF's available including iShares China Index Fund (XCH), iShares FTSE/Xinhua China 25 (FXI) and SPDR S&P China ETF (GXC) as a starting point for your own research.

The ebook follows on from the 3rd of April 2011 publication of key analysis and concluding trend forecast for the DJIA stock index for 2011 (Stocks Stealth Bull Market Trend Forecast 2011), that includes the full detailed analysis and additional trend forecasts for the following major world stock market indices : UK FTSE100, China SSEC, India BSE and Russia RTSI.

Download Now- The Interest Rate Mega-Trend Ebook (PDF 2.8meg), the only requirement is a valid email address.

                         CONTENTS

   
  Introduction
1
   
     Why a Stocks Stealth Bull Market?
2
     2009 - Birth of the Stocks Stealth Bull Market
2
     2010 - Bull Market Consolidates and Targets 12,000
9
     Bear Market Rally Mantra Repeatedly Busted
13
     The Head and Shoulders Propaganda Pattern
14
     Hindenberg Crash Omen Proved to be the Summers      Best Contrary Indicator!
15
     Economy & Inflation Conclusions Applied to the      Stock Market
16
     Stock Market Mega-Inflationary Trend
18
     Rising Interest Rates Implications for the Stock      Market
19
     Black Swan Events - Japanese Tsunami and Nuclear      Meltdown
26
     Crude Oil Price Impact on Stock Market Trends
30
     The Copper Price and the Stock Market Trend
32
     Stock Market Manipulation
33
     Current Stock Market Sentiment & Psychology
34
     Quantitative Easing AKA Money Printing
35
     U.S. Dollar and Stock Market Trend Relationship,      Currency and Real Wars
37
     Stocks Stealth Bull Market Elliott Wave Analysis
40
     Stock Market Technical Analysis
44
     Formulating a Stock Market Conclusion for 2011
47
     STOCK MARKET FORECAST 2011 FINAL      CONCLUSION
49
     Risks to the Forecast
50
     The SHOCK MARKET BUBBLE
50
     The Stocks Stealth Bull Market Mega-trend 50
     FTSE 100 Stocks Index Forecast 2011 51
     Emerging Markets Outlook 2011 52
     CHINA 54
     INDIA 57
     RUSSIA 59

Recap of Stock Market Trend Forecast for 2010 - 02 Feb 2010 - Stocks Stealth Bull Market Trend Forecast For 2010

Dow 10,067 - Stocks Multi-year Bull Market that bottomed in March 2009 will trend Sideways during first half of 2010 attempting to break higher. The second half will see a strong rally to above 12,000 targeting 12,500 during late 2010.

DOW Stock Market Forecast 2010

Source and Comments: http://www.marketoracle.co.uk/Article27588.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2011 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of three ebook's - The Inflation Mega-Trend; The Interest Rate Mega-Trend and The Stocks Stealth Bull Market Update 2011 that can be downloaded for Free.

Stocks Stealth Bull Market Ebook DownloadThe Interest Rate Mega-Trend Ebook DownloadThe Inflation Mega-Trend Ebook Download

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

raj
26 Apr 11, 19:16
china funds

Hi Nadeem,

with regards to china, do you recommend the use of funds such as gartmore china opportunities or fidelity china special situations?

Thanks


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