The US Stock Market – From China Perspective, It’s A Desirable Value Play

Friday, March 5, 2010

Last week, once again, US investors placed most of their equity mutual fund purchases into international stocks. They love the growth going on elsewhere, especially in emerging markets.

But wait! The news out of China is that it is investing in US stocks and real estate (“China’s investments in U.S. up sharply – The strategy seeks higher earnings by acquiring assets while prices are depressed,” Los Angeles Times, March 4).

They’re savvy money managers, so what do they see? In a word: Value.

To comprehend China’s moves, we need to get their point of reference. Here in the US, we understandably view the rest of the world from our slower moving US train. What we see are speeding emerging market trains zipping by.

Now, let’s put ourselves aboard that fast China train and look out the window. There’s that slow US train. From this perspective, here’s what we know:

  1. The China train is traveling near maximum speed – fast, but not accelerating. In fact, the engineer has had to pull back on the throttle and even apply the brakes a bit. Also, the train is packed – demand is large, so prices are high.
  2. The US train, meanwhile, is traveling slowly, although it is starting to accelerate. The boiler is being stoked and the throttle is wide open. US industry, when it gains full traction, will be traveling much faster than now. This train has many empty seats – demand is less, so prices are lower.

From a Chinese investment standpoint, we could stay the course with local assets, riding the fast train. However, the higher prices mean there is the risk of loss if growth slackens.

Or, we could buy some lower-priced US assets, with the expectation that the US will continue accelerating, increasing its growth rate – and prices. This is a classic value play. It is also wise money management – diversifying growth holdings with value.

So, as US investors, we shouldn’t forsake the plodding US economy for the speedy emerging country economies. Rather, we should take full advantage of being at the center of a value play.

Note: Financially strong US companies are also in the search for this value. See “With Fistfuls of Cash, Firms on Hunt – Companies Begin to Tap Record Capital Piles for Mergers” (The Wall Street Journal, March 4, page C-1).

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March 2010