China After the Deal


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Let’s take a look at China.

Earlier this month I sent our Purposeful Investing Course subscribers an update on the Chinese stock market’s potential since conclusion of the Phase I trade deal.

I shared some thoughts from the January 2020 issue of the ENR Asset Management Market Outlook (1) about the US, China Trade Deal.

The Outlook says:

The United States and China agreed to terms of a ‘Phase One’ deal earlier in December, which includes a commitment by China to purchase $50 billion worth of agricultural goods in 2020 along with energy and other goods. The U.S. agreed it would reduce the tariff rate on many Chinese imports ranging from 15% to 25%. The United States will soon turn its focus on the European Union, which continues to build significant trade surpluses with the United States since the 1980s. In 2019, that trade deficit is projected to be about $150-$180 billion;

Though world markets welcome the limited détente between the United States and China, implementation of the Phase One trade accord will prove tricky to implement. Any improvement in relations is likely to be temporary with tensions on both trade and other issues like technology likely to remain confrontational.

Having lived in Hong Kong for 6 years (decades ago), I gained great respect for the tenacity and long range view of the Chinese philosophy.

The Chinese play a long game and the recent New York Times article “Trump Gets His Trade Deal, China Gets the Win” by Dr. Eswar Prasad (2), professor at Cornell University and a senior fellow at the Brookings Institution suggests their tactics in this recent agreement reflect this fact.

Here’s some excerpts from the article:  China has suffered short-term pain from the trade war, but it stands to gain in the long term.

The phase-one agreement leaves many issues unresolved, so tensions between the two countries may continue.

What has the deal accomplished? It will bring some significant changes but comes with a big price tag for the American economy. The long-term effects might end up favoring China.

As part of the deal, China has agreed to increase its purchases of products from the United States.

More important, China has agreed to beef up its protection of intellectual property rights, to refrain from forcing foreign companies operating in China to transfer their technology to domestic firms, and to open up more of its economy to foreign investment.

In return, the United States has reduced some tariffs on Chinese imports and canceled additional tariffs.

Why did China make these concessions? Therein lies a deep irony. Many elements of the deal will make the Chinese economy stronger. China wants to be a more dynamic, innovation-led economy, so better protection of intellectual property rights will help. Opening up parts of its economy, such as banking and insurance, will spur competition and innovation in, for example, the Chinese financial sector. Many of the ostensible concessions are in areas where Chinese reformers have long sought to create change for their country’s own good.

China’s economy will also get a short-term boost from the trade deal. Stimulus measures, such as more spending by local governments, lower taxes and more bank credit, have kept growth from stalling, but the economy remains fragile.

This is why I, my portfolio (the one we track in our Purposeful Investing Course Pi) treats China as a developed rather than emerging country.  As the value of the ETF I chose for the portfolio, has risen it, as of January 16, 2020 represents, 8.1% of the portfolio.

Hong Kong represents 7.9% of the portfolio as well, so 15.9% of the total investments are Chinese related.

Let’s look at these two Chinese related ETFs.

The iShares FTSE/Einhua China 25 Index (symbol FXI) invests in the 25 largest Chinese companies.  Here’s some data from my online broker Motif.

motif

This Chinese market ETF was up 13.4% in 2019.

The iShares Hong Kong Index ETF (symbol EWH) represents investments in a good value developed market.

motif 2020-01-16 at 7.15.03 AM

The fund rose 9.67% in 2019.

The largest economies after the US and China, are the UK, Germany, France and Japan.  All three European economies were boosted by the Marshall Plan in the 1940s right after WWII.

Marshall Plan type support was expanded in the 1950s to include Japan.  China was not included in support from the US economy until after President Nixon thawed East West tensions in the 1970s.   This delayed China’s economic expansion by 20 years.

My belief is that as China, the largest nation in the world by population (four times more people than the USA) continues to improve its productivity and GDP per person, will continue to rise faster than that of the Western world, for a bit longer.  Due to the huge population its economy is just too large to treat as a secondary market.

Keep in mind, all of the investment in both China and Hong Kong are predicated on value. 

My overweighting in China is based on my assumption of the future… an educated guess at best. My investments in China now are based on math.  The Chinese stock market is a good value market.

The decision to invest in the Chinese and Hong Kong markets are first and foremost based on the math that compares average Price to Book, Price Earnings Ratio and Dividend Yields of each market.

                Price to Book           P/E Ratio           Average Dividend Yield

USA                3.65                          23.1                                1.83%

China             1.81                           14.7                                 1.87%

Hong Kong   1.28                           14.4                                 3.03%

Gary

Prophet Words for Profit in 2020

Here’s ten most important words (and numbers) for the 2020 decade…  MSCI World Index All-Time High Valuation December 31, 1999.

Keep these word and numbers in mind when thinking about the stock market this year.

Here is the all time high valuation for this index.   Price to book 4.23.  Price Earnings Ratio 35.7. Average dividend yield 1.30%. 

Those were the all time high valuations for the Morgan Stanley Capital World Index in December 1999, just before the dot.com bubble burst.

Here is a chart of the Dow Jones Index for the past three decades.  You can see that bubble pop just before the beginning of the 2000 decade.

microtrends.com

Let’s compare some valuations just before the US stock markets began to crash

                                                                                 Price to Book       P/E       Average Dividend

The All World MSCI World Growth Shares           5.22                28.4                 1.28%

MSCI  US Index                                                               3.65                 23.1                  1.83%

MSCI Word Index                                                           2.57                 20.0                  2.33%

MSCI World Index All-Time High                            4.23                  35.7                  1.30%

MSCI USA Index                                                            3.65                  23.1                   1.83%

These valuations create the important investing question. “Will the 2020 decade be more like the 2000s decade or the 2010 decade?”

The current bear market suggests that we are back in a 2000 scenario, which mans that the greatest opportunity is ahead.

“How close can the USA Index come to the all time high watermark before there is a correction?”

For the past four years, my strategy, to protect against the next stock market crash and yet gain from rising share prices is to invest in an equally weighted  of the value based portfolio of country ETFs we invest in and track in our Purposeful Investing Course is formulated.

The valuation of the top value portfolio we use as the basis of our portfolio is now Price-to-book  below 1.4, P/E Ratio under 14 and average dividend yield of nearly 4%.

An equally weighted combination of  these top value markets offers the highest expectation of long-term risk-adjusted performance and the valuation of the top value portfolio is now undervalued by more than 40% compared to the MSCI World (Standard) Index, by 50% compared to the MSCI USA Index and by 62% compared to the MSCI World Growth Index.

Since no one knows what the future will bring, investing in value makes the most long term sense.

Our Purposeful Investing Course (Pi) teaches an an easy, simple and effective approach to zeroing in on value because little time, management and guesswork is required.  You are investing in a diversified portfolio of good value indices.

Sticking to math based stock market value and country ETFs eliminates the need for hours of research aimed at picking specific shares.   Investing in an index is like investing in all the major shares of the market.  You save time because all you have to do is invest in the ETF to gain the profit potential of the entire market.

To achieve this goal of diversification the Pi portfolio consists of Country Index ETFs.

Country Index ETFs are similar to an index mutual fund but are shares normally traded on a major stock exchange that tracks an index of shares in a specific country.  ETFs do not try to beat the index they represent.  The management is passive and tries to emulate the performance of the index.

A country ETF provides diversification into a basket of equities in the country covered.  The expense ratios for most ETFs are lower than those of the average mutual fund as well so such ETFs provide diversification and cost efficiency.

Here is the Pifolio I personally held at the beginning of 2019.  Now I am updating my plan to include when it’s best to invest more.

70% is diversified into developed markets: France, Germany, Hong Kong, Italy, Japan, Norway, Singapore, Spain and the United Kingdom.

30% of the Pifolio is invested in emerging markets: Brazil, Chile, China, Colombia, the Czech Republic, South Korea, Malaysia and Taiwan.

iShares Country ETFs make it easy to invest in each of the good value markets.

The ETFs provide incredible diversification for safety.  For example, the iShares MSCI  Japan (symbol EWJ) is a Country Index ETF that tracks the investment results the Morgan Stanley Capital Index MSCI Japan Index which is composed mainly of large cap and small cap stocks traded primarily on the Tokyo Stock Exchange mainly of companies in consumer staples, financials and materials. This ETF is non-diversified outside of Japan so an investment in the ETF is an investment in hundreds of different Japanese shares.

iShares is owned by Black Rock, Inc. the world’s largest asset manager with over $4 trillion in assets under management.

There is an iShares country ETF for almost every market.

How you can create your own good value strategy.

I would like to send you, on a no risk basis, a 130 page basic training course that teaches the good value strategy I use.   I call this strategy Purposeful Investing (Pi).  You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

When you subscribe to Pi, you immediately receive a 120 page basic training course that teaches the Pi Strategy.   You learn all the Pi strategies, what they are, how to use them and what each can do for you, your lifestyle and investing.

You also begin receiving regular emailed Pifiolio updates and online access to all the Pifolio updates of the last two years.  Each update examines the current activity in a Pifolio, how it is changing, why and how the changes might help your investing or not.

You also receive a 100+ page PDF value analysis of 46 stock markets (23 developed markets and 23 emerging stock markets).  This analysis looks at the price to book, price to earnings, average yield and much more.

This year I will celebrate my 52nd anniversary of global investing and writing about global investing.  Our reports and seminars have helped readers have better lives, with less stress yet make fortunes during up and down markets for decades.  This information is invaluable to investors large and small because even small amounts can easily be invested in the good value shares we cover in our seminar.

Those five decades of experience have taught me several incredibly valuable lessons.

The first lesson is that there is always something we do not know.

The second lesson is that stock market booms and busts always eventually return to value.

Third, the only sure way to succeed is to use time not timing.

Time is your friend when you use a good value strategy.  The longer you can hold onto a well balanced good value portfolio, the better the odds of outstanding success.

A 45 year portfolio study shows that holding a diversified good value portfolio (based on a  good value strategy) for 13 month’s time, increases the probability of out performance to 70%.  However those who can hold the portfolio for five years gain a 88% probability of beating the bellwether in the market and after ten years the probability increases to 97.5%.

Subscribe to the first year of The Personal investing Course (Pi).  The annual fee is $299, but to introduce you to this online, course that is based on real time investing, I am knocking $102 off the subscription.

Guarantee

Enroll in Pi.  Get the basic training, the 46 market value report and access to all the updates of the past two years.

 I guarantee you’ll learn ideas about investing that are unique and can reduce stress as they help you enhance your profits through slow, worry free, easy diversified investing.

If you are not totally happy, simply let me know in the first two months for a full no fuss full refund.

You have nothing to lose except the fear.   You gain the ultimate form of financial security as you reduce risk and increase profit potential.

Subscribe to Pi now, get the 130 page basic training, the 120 page 46 market value analysis, access to over 100 previous Pifolio updates, plus begin receiving regular Pifolio updates throughout the year.

Subscribe to a Pi annual subscription for $197.

Your subscription will be charged $299 a year from now, but you can cancel at any time.

Gary

(1) ENR Market Outlook at http://www.enrassetmanagement.com/marketoutlook.html.

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(2) www.nytimes.com/2020/01/15/opinion/china-trade-deal-trump.html?nl=todaysheadlines&emc=edit_th_200116?campaign_id=2&instance_id=15127&segment_id=20368&user_id=208b2cbe62eb7b536babab791d172bc7&regi_id=483172790116