Say what you want about the Trump administration’s trade war strategy. But one thing is clear…
It’s creating a historic opportunity to buy China’s biggest companies.
For example, the iShares China Large-Cap ETF (NYSE: FXI), which is down about 10% year-to-date.
It seems that for every $200 billion poker chip the administration shoves to the center of the table, investors take a few billion more off of it — by selling Chinese stocks.
The ETF’s portfolio carries big stakes in the likes of high-flying Chinese internet companies like Tencent Holdings and telecoms like China Mobile, as well as oil, chemicals, insurance and banks. Basically, it’s a play on the growth of China’s economy.
And the price you’re paying for that growth, relative to profits, comes with some of the cheapest price tags (in dollar terms) in years.
Buy Chinese Stocks at a Discount
Over the last 12 months, the companies in the exchange-traded fund (ETF) earned almost $15.50 a share. Yet at the fund’s current price, it works out to a price-to-earnings ratio of 2.6. You’d have to go back to 2010 to find a valuation that cheap.
And it’s quite a discount when you consider that investors were willing to pay a record-high 15 times earnings back in 2013 to own this ETF.
We can see the discount from a dividend perspective as well. The fund’s semiannual distributions work out to a yield of about 3.6%, the highest since 2009.
Likewise, these same companies are trading at record-low stock prices compared to their asset value in the “real” world.
The tangible book value of the 50 or so companies in the fund’s portfolio are worth a combined $52.61 per share, according to data from S&P’s Capital IQ.
Yet you can buy the fund itself at a 22% discount right now — or a grand total of less than $42 a share, as of Monday’s trading session.
That’s the ETF’s cheapest price-to-book value since 2009.
Emerging Markets Will Have Their Day Once Again
Of course, the situation then was much different.
In terms of stock values, China’s equities were running in symmetry with U.S. stocks (and the rest of global asset values) as both mature and emerging markets climbed out of the depths of the financial crisis.
These days, the situation might be described as “asymmetrical” — the U.S. market on the high end of the teeter-totter, while the rest of the world’s equities markets scrape along the low end.
That situation won’t last forever.
When it does, emerging markets will have their day once again. The cheapest markets, like China’s, with lots of growth to offer, will be where the action is.
Kind regards,
Jeff L. Yastine
Editor, Total Wealth Insider