Fisher: China’s bear market is not a crisis, it’s an opportunity
What a great time to buy Chinese stocks! No, I haven’t lost my mind, although Western experts would surely say so. Today, many say the Chinese market is “non-investable” with recent regulatory revisions and plummeting stocks involving too much risk. Wrong! Chinese stocks offer a stake in your country’s still stellar long-term growth potential, now at a steep discount, thanks to recent declines. Yes, this bear market can sting in the short term. But look longer term to see China’s bear market for what it is: a great opportunity, not a risk of portfolio crush.
China’s long real estate boom and nine bearish stock markets since 1994 may make stocks risky and speculative compared to the real estate holdings that underpin the wealth of most Chinese investors. In addition, owning a property apparently gives investors a tangible interest in China’s long-term economic development. Stocks can appear fragile by contrast, swaying from moment to moment – often in a wild way.
But such views miss what stocks really are: ownership in the companies so essential to China’s development. Don’t think of them as pieces of paper or ticker symbols flashing “up” or “down” on a cell phone or computer screen. Think of them as claims about a company’s future profits – a soft slice of its growth. Dividend payments, new sources of income, one-time windfall gains – one share gives you a share of all those shares.
Yes, stocks can be volatile in the short term. But collectively and over the long term, they reflect major economic and corporate trends and developments. New technologies and medical advancements, innovations revolutionizing the way we communicate, ideas that leverage existing resources more productivity – stocks tie your portfolio to these opportunities. Therefore, a diversified portfolio of Chinese equities is not like betting on a list of symbols – it participates in China’s long-term growth potential.
Recent news changes nothing. Outside of the United States, China offers more access to large, growing companies than anywhere else, thanks to the tech giants leading your “new” economy. Yet even with a shift to technology and service-oriented businesses, China still accounts for 28% of global manufacturing output, leading the world by far. Owning Chinese stocks means you benefit from the ingenuity and resources that drive this diverse growth.
Western experts cannot see this. Instead, they see recent stock market declines as a sign of things to come – and a reason to avoid Chinese markets altogether. They cry out cascading flaws extending far beyond Evergrande and the draconian tech regulations lurking just around the corner. Does not reflect their myopic panic. Instead, profit from their wrong by buying what they are selling.
Pessimism almost always succumbs to pessimism later in bear markets. Yes, Chinese stocks are down about 30% since February. But even the short-term growth outlook remains attractive. Corporate profits are expected to increase by more than 20% next year. Gross domestic product is expected to increase by 5.5%, exceeding the 4.9% expected by the International Monetary Fund globally. Rapid growth does not guarantee big stock returns. But when you consider that this bear market has many Western pundits once again fearing a hard landing, you can see that the potential for positive surprise – which markets love – is strong.
Could the housing market turmoil spread, further dampening near-term growth? May be! But the global hype over Evergrande’s woes means markets have already anticipated deeply gloomy expectations. And, even if Evergrande fails, that doesn’t mean your government won’t limit the fallout by protecting suppliers, workers, and customers. Beijing is already signaling that it will protect healthy consumers and developers while pushing banks to make credit easier for homebuyers.
History suggests that the worst of the dive may be behind us. Since 1993, the median peak of decline in China’s previous eight bear markets has been -52%. Yet these are skewed by massive bears at the start of China’s development. Since the 2008 financial crisis, Chinese bear markets have posted a median return of -33.8%. At its lowest to date, this bear market reached -32.8%. After those eight previous lows, stocks have soared. The median return three months after the lows: 27.4%. Six months after the trough? It was 43.9%. Look no further than the flash bear market of 2020 for a prime example. After falling -20.3% from Jan.13 to March 19, Chinese stocks roared – quickly. Three months after the trough, they were up 36.6%. Six months after the trough, they had gained 44%.
History offers no guarantees. But avoiding stocks now risks missing out on the powerful rebounding gains that new bull markets are bringing – gains you can never recover. I have no idea what the exact bottom of this bear market is – no one can tell. Inventories could fall a little more. But in my opinion, the pros now far outweigh the cons. If you’re already invested, hang in there. Have cash? Now is a great time to bite the bullet and buy.
The dramatic – often negative – daily volatility that the late stages of bear markets usually bring makes this difficult to do. Many investors mistakenly view these frequent fluctuations as proof that real estate is safer than stocks. But for investors, opacity is actually a negative characteristic. You may not see the price of an investment property fluctuate from day to day. But with home sales plunging 20% in August alone, should prices hold steady? Especially with struggling developers selling assets to raise money quickly after the government implemented the “three red lines” and other rules to limit debt and cool house prices? Unlikely!
With stocks you get a clear assessment of minute-by-minute value. This does not mean that you should act on these oscillations in real time, far from it! But the depth and liquidity of the stock markets give you the price transparency you need to easily adjust your allocations whenever you want.
And if you see one big negative that others are missing out on, you can sell stocks quickly – and with minor costs. Immovable? Good luck.
Now is not the time to sell stocks, it is quite the opposite. Today’s negatives are glaring in the headlines from Fuzhou to Florida and everywhere in between. Panic from experts has pre-assessed the catastrophe, prompting the positive surprises that arise in the darkest depths of bear markets. The bottom might not come today, tomorrow or next week. But it probably happens before most investors expect it. Make sure you’re in a good position to ride on the supercharged V-start when it comes.
Ken Fisher is the Founder and Executive Chairman of Fisher Investments.
The views and opinions expressed in this opinion section are those of the authors and do not necessarily reflect the editorial positions of Caixin Media.
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