Is NOW the time to invest in the world's CHEAPEST index?

by , 22 November 2018
Is NOW the time to invest in the world's CHEAPEST index?
Right now, the world's best value in stocks is in a specific country's stock index.

And I'm not talking about a small random country but one of our global trend setters.

Its index holds some of the largest companies in the world.

Companies bigger than its US counterparts in terms of assets and sales.

So why is this index verging on rock bottom?
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It’s nothing to do with ‘Black Friday”
 
Black Friday is around the corner but the companies that make up this index aren’t holding a sale for investors nor is it anything to do with the real events that led to Black Friday.
 
 
Friday the 13th 1989 is known as “Black Friday” because of the mini stock market crash.

It was caused by a reaction to a news story of the breakdown of a $6.75 billion leveraged buyout deal for UAL Corporation, the parent company of United Airlines.

When the UAL deal fell through, it helped trigger the collapse of the junk bond market and stock market.

For example, the Dow Jones Industrial lost nearly 7%, the S&P 500 lost 6.1% and the Nasdaq lost 3% in just one day.

 
 
 Instead, it has everything to do with “Trade Wars” and forced selling…

 
The Hang Seng China Enterprises Index (HSCEI) holds the 50 largest Chinese companies that trade in Hong Kong. These Chinese companies are some of the largest in the world.  And this year, the companies listed on this index have taken a beating.

Why?

Firstly, Chinese shares have been ‘ground zero’ for the trade war with the US. Tit-for-tat tariffs from the world’s two largest economies now apply to goods totalling close to a cumulative $300 billion (about R4.3 trillion).

So, the impact of these tariffs has affected China’s already slowing growth. In fact, earlier in October, JP Morgan said a full-blown trade war could have a 1% shrinking effect on China’s economy.

Another theory as to why Chinese stocks have fallen so much in 2018 could be the continued impact of forced selling.

You see, in China, hundreds of companies use their shares as collateral for loans, but when share prices fall, they are forced to sell to maintain a certain level of balance in brokerage accounts, used to lend the companies money.

According to Bloomberg, about 4.18 trillion yuan (R8.6 trillion), worth of shares have been put up by company founders and other major investors as collateral for loans, accounting for about 11% of the country's stock market capitalisation.

As stocks have fallen, pledged shareholdings have been liquidated to settle outstanding debts, which create a spiral effect of selling.
 
This “mini-crash” has now presented REAL value in the companies listed on the Hang Seng China Enterprises Index
  1. The price-to-earnings (P/E) ratio, and
  1. The dividend yield.
The P/E ratio compares an investment's share price to its earnings per share.

The lower the share price is relative to earnings, the cheaper the share is valued, which means we can expect buyers to soon dominate the market which will bring up the share price…

The dividend yield, on the other hand, is also an important measure to show how much a company pays in dividends each year, relative to its share price.

This Hang Seng China Enterprises Index is trading at a PE ratio of 8 with a dividend yield of 4.5%.

For comparison, the benchmark index for the US – the S&P 500 – is on a P/E ratio of 22.05. And its dividend yield is 1.94%.

This is important as it tells us in rough terms that there’s an incredible amount of upside potential here. You see, for this index to catch up to the largest 500 US company valuations, it would have to rise somewhere between 132% and 175%.

 
But now is not the best time to buy…

That’s because the down trend is not over.

Once the escalation in tariffs between the US and China subside, it will alleviate a lot of the selling pressure.

This will in turn see the uptrend return. And when this happens, there will be great opportunities to make a large amount of money in Chinese stocks over the next three years. I explained why in my latest issue of
 Real Wealth and I’ll be telling readers when exactly to get in..

If you want to be ready for this upturn then why not join our Real Wealth network. 

See you next week.

Joshua Benton,
Managing editor, 
Real Wealth

P.S. To discover the best opportunities in China that could net you a fortune in the coming years, then I urge you to read Real Wealth.

To confirm this, we can use two of the most classic measures of stock market value…
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Is NOW the time to invest in the world's CHEAPEST index?
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