Market Outlook: 03-26-08

Robert Hsu, March 26, 2008

It's not surprising that the American stock market is volatile right now given weak economic data and earnings reports. But, as you know, economic growth in China isn't slowing and many of China's leading companies have announced strong earnings recently. Today ICBC, China's largest bank, increased earnings by 65% in 2007, while China Life announced a profit increase of 95% in the same period. Also, China Mobile announced that it added 7.9 million new subscribers in last month alone, the biggest monthly increase ever for any wireless operating company in the world. And I expect this type of strong earnings growth to continue for Chinese companies.

So with strong earnings reports and economic growth, why are Chinese stocks weak right now?

Considering that the Shanghai stock market was up 300% in the past two years, it was due for a sharp correction. The Mainland Chinese Shanghai index, which was the world's best-performing stock measure last year, has declined 28% so far this year. And after the market's peak on October 16, it has lost 34%. The main reason for drop is because Chinese investors are concerned that the government will raise interest rates to tame 11-year high inflation, which will ultimately hurt profits during a time when the U.S. economy is slowing. And these concerns are certainly not unfounded. Just last week, the Chinese central bank asked lenders to set aside more deposits in reserves for the second time this year after raising interest rates six times in 2007.

Currently, Chinese stocks listed in Hong Kong are becoming more attractive again. These stocks are 60% cheaper than those listed in Mainland China, and they trade at 15X 2008 estimated earnings with 20% average annual growth. In a negative real interest rate environment, these stocks are compelling opportunities to investors with a multi-year time horizon.

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