China ETFs: Too Much Optimism or Too Much Pessimism?

Working in Southeast Asia at different points in the 80s and 90s, I marveled at the blind adoration of Mark Mobius. When the emerging market guru arrived in Taipei or Hong Kong for a speech, it was always a celebrated event. The financial media fawned over his presence the way that the entertainment media currently fawn over Angelina Jolie.

I have great respect for Mr. Mobius… don’t get me wrong. Yet I am always concerned by a buy-n-hold-forever attitude for any country’s stocks.

Throughout the 80s and 90s, up or down, the Mobius message was “Buy, buy, buy.” Even after developed market woes in the current decade… even after 100% doubling in China market cap value over the last 7 months… Mobius preaches “Buy, buy, buy” China stocks.

Mark Mobius, the head of Templeton Asset Management, would be bullish on China whether major benchmark indexes quadrupled or if they lost 3/4 of their value. And that’s just not the way to manage risk.

Granted, I’ve advocated for years that China has the brightest future of any BRIC nation. Yet one should reduce the possibility of loss (i.e., risk), especially when major benchmarks fall below 200-day moving averages.

Mobius recently explained away the threat of an asset bubble in China by stating the Chinese government takes action to restrict credit if they perceive a bubble forming. I guess the U.S. government didn’t see a bubble forming… but the Chinese government is more capable in slowing down excessive risk taking?

Ironically, if China restricts money supply and credit, investments in stocks will likely decrease. That’s a bit of a Catch 22. Stifle asset bubbles and you risk stock market woes.

Not everyone is endlessly enamored. Former Morgan Stanley analyst Andy Xie believes that Chinese stocks are 50% to 100% overvalued. Similarly, a Morningstar analyst (Kum) sees a housing bubble forming where property prices are too hot, but doesn’t believe that stocks are overvalued.

Maybe not. But don’t the Chinese securitize a variety of loans? Aren’t they encouraging derivatives? And didn’t the Chinese recently remove bank quota restrictions on providing loans to homeseekers? And didn’t the U.S. housing mess essentially cripple fairly valued U.S. stocks under eerily similar circumstances?

I myself still believe there’s room for the Chinese consumer to significantly boost Chinese stocks. But I am not married to the probability. Stuff can happen!

For me, it’s important to consider the trendlines. And it’s critical to use stop-losses to reduce excessive downside risk.

It’s also critical to understand what you own. The best investment in Chinese consumer purchasing power is not the ever-popular China 25 (FXI) or the increasingly visible Morgan Stanley China (CAF). It’s Claymore China Small Cap (HAO).

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[richjoy403:]

I believe in the long term growth of the Chinese market (and a number of other emerging markets, for which I own VWO). I own both FXI and HAO, and am quite pleased with the combination.

Oct 01 06:54 AM

[CLH:]

Buy and hold is the best way for emerging markets. Only fools buy and sell. They move too fast.

Oct 01 09:07 AM

[Alphameister:]

"Full of sound and fury, signifying nothing."

Oct 01 10:53 AM

[Ben Gee:]

Even if China is going to grow by 6-7% annually for the next 20 years, I will still invest in China. I am waiting for the Chinese bubble to burst and it will, then, it will be time to load up.

Oct 02 05:54 AM

[predict_what:]

China ETFs are the only (BRIC) ETFs that have suffered some meaningful correction in 2009. I think more optimism exists in ETFs for Russia, India, and Brazil. Ditto the ETFs for developed markets.

Oct 03 11:47 PM

[stockmarket...:]

It is wise to take some off the table when you see a bubble forming. We are getting to that point in emerging markets. I'm starting to sell things I bought dirt cheap over the past 1 1/2 years.

Nov 14 05:35 AM