China is in chaos.
The Coronavirus has just about brought the world's second largest economy to a standstill.
As a nation, the Chinese have been restricted to their homes. The government has cancelled flights… Shut down cities… And tragically nearly 500 people have already lost their lives!
It's a disastrous social crisis, and one which has roiled global markets.
On the economic front, since the first reports of the virus broke in mid-January, the FTSE China 50 Index has plummeted almost 11% in dollars and dragged the rest of the world's markets lower as well.
To put that in perspective that's almost a decade's worth of returns on a USD bank account wiped out in less than a month.
The Chinese simply aren't allowed to go to work right now.
The sheer scale of the disruption to goods and services is immense. While the reaction measures are very necessary in slowing the spread of the virus, the flip side of the coin is if people don't work, businesses can't produce. And that means companies lose money.
This, in turn, has shattered business confidence… Investors in China (which has a market dominated by retail, man-on-the-street type investors rather than institutional players like SA) are panicking as money is drained from the financial markets.
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Is there any upside to this tragedy?
From a social perspective the answer is of course “no”. However, since this is an investment column, we need to put aside our emotions and be faithful to our readers in rooting out opportunities as and when we see them. And, when tragedy strikes, especially on this scale, perceived risk to financial markets is often greater than the actual risk.
What does this mean?
It means while there will undoubtedly be a real world economic impact owing to the extreme reaction required to fight the virus, there are investments which stand to benefit when the world normalises.
For today’s investment pick, I’ve gone with a general Chinese market tracker.
Firstly, because investors seem to have forgotten there’s nothing structurally wrong with the companies whose profit margins have been affected by the shutdown of Chinese business. Yes, they’re going to feel the impact on their financials for a while but, with the dramatic fall in prices, by my calculations, this has already been more than accounted for... And since markets are forward looking as soon as the rest of the market realises these assets are undervalued, you’re likely to see a sharp recovery.
I believe, once the Coronavirus is under control, this index will recover. FAST. In fact, I estimate that if you act now, there’s at least an 8% upside for you to cash in on in the next few weeks.
Now, you may feel it’s unpalatable to “profit” off tragedy by buying into China at this stage, but nothing could be further from the truth.
Firstly, the Chinese Central Bank is providing liquidity and buying in the open market.
They believe the best financial method available to aid China is to buy Chinese assets and thus stabilise prices. And, as the old saying goes don’t fight the Fed. In this case, I would say DON’T FIGHT THE PEOPLES BANK OF CHINA!
Secondly, the index I’m suggesting has its largest holding (around 10%) in internet company Tencent. So, while the likes of Starbucks (which is not included in this index) will lose sales (they’ve shut down around half their 4,300 Chinese outlets) and people won’t buy two weeks’ worth of coffee when they reopen. Tencent’s major money spinner is internet gaming. With a huge population staying home I’ve got to assume internet connectivity, gaming and online purchases will skyrocket!
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What is the best way to invest in the Chinese market?
There are several ways to buy this index, but my preferred entry point is via the iShares China Large-Cap 50 ETF. Its ticker code is FXI and it can be bought with USD on the New York Stock Exchange Arca.
I truly believe, this tragic social crisis offers you the opportunity to buy premium Chinese companies at some of the lowest prices we’ve seen in ages! I’m talking about companies that operate properly, are performing well and show little, impact from the ongoing crisis.
I have also identified a number of other companies, from pharma giants which supply drugs to medical manufacturers supplying masks and testing kits. To find out more send me an email at email@example.com and I’ll show you how to set up your offshore account. It is far easier than you think to get started!
Rand Swiss, Wealth Manager