Everyone in the SmallCap China space has their own story about when they first got sold on China as a great investment opportunity. For me, it happened in 1993 when I toured several Chinese factories in Guangdong. The factory buildings were simple and sometimes worn, but always suitable and spacious. And very cheap to build. The worker dormitories were something I hadn’t seen before but they made perfect sense. More impressive still were the workers. They were skilled and disciplined, and very hard working.
But most of all, it was the numbers. For factories and manufacturing, China’s labor and facilities’ costs were more than 90% less than US norms. It was obvious that more and more of the world’s manufacturing would go to China. How could it not? Costs seek their lowest level like water flowing down a mountain.
Many people watching China today are mindful of Japan in its ascent. In a very short span, Japan went from being known for cheap low-quality products to being the global leader in high-tech manufacturing. China is doing a similar walk up the value chain, but without leaving low cost manufacturing to other countries. China’s 800 million rural citizens should be able to supply the country’s low cost labor needs for at least a century, maybe ten.
I can’t tell you when the US economic crash will turn around, or how long or deeply it will affect China’s economy. One thing I can confidently proclaim is that when the smoke finally clears, China will not have ceded any of its dominance in manufacturing. China’s neighbors will not have taken market share and neither will the US or Europe. China will emerge more competitive than ever.
Yes China’s growth has been slowed and many industries have been significantly impacted by the rapid changes in global demand levels (as well as commodity price levels). However the Chinese economy has other areas that are sufficiently strong to compensate and result in overall positive economic growth for the country. Slower growth but continued growth – that is the consensus forecast for China.
Continued growth. Meanwhile the rest of the world is in recession, with almost all of the world’s biggest banks requiring bailouts. I am not saying that China is a safe haven for investors, certainly China has many of its own special risks. But with those risks have been stellar returns.
Before the Financial Crisis, US and Canadian listed China SmallCaps were routinely posting annual profit growth of 25-40%+. Investors were doubling and tripling their money and Chinese companies were among the leading gainers on western exchanges. Then the perfect storm hit the wider market and the hedge funds in particular, and today it seems that almost all the stocks in the China space are depressed.
But they haven’t all missed their projections, and some are doing much better than others. That is my main insight for you today. The forced selling from hedge fund redemptions has resulted in indiscriminate sell-offs and almost all the stocks in the space are down. But financial performance in the space hasn’t been uniformly down but rather mixed, with some companies doing better than others, and some actually on plan.
The market hasn’t done a good job yet of sorting out the space, and that creates special opportunities for investors that do their homework. Never before has there been so many high growth companies available for single digit multiples. Incredible rewards await the investors that re-align their portfolios and load-up on low cost China stocks that manage to post strong growth in 2009 and 2010.
Happy Hunting!