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One of the World's Cheapest Markets Is Soaring

By Brett Eversole
Monday, August 4, 2014

No one's paying attention... But one of the world's cheapest stock markets has entered a stealth bull market...
 
Since bottoming in March, this market is up 23%. But no one is talking about it...
 
Better still, history shows that this could be just the start of a much larger move. Triple-digit gains are the norm from these levels.
 
Let me explain...
 
Today's opportunity might not be in the most savory place to invest... But it's one you have to consider right now.
 
Our big opportunity is in China...
 
You see, Chinese stocks have been stuck in a bear market over the past few years. The iShares China Large-Cap Fund (FXI) remains 33% below its 2007 high. But over the last few months, Chinese stocks have rallied...
 
FXI is up 23% since March. And it's in the midst of breaking out of its multiyear downtrend. Take a look...
 

Longtime readers know we always like to wait on an uptrend before buying. Cheap stocks and stock markets can always get cheaper. So, buying after an uptrend begins dramatically lowers our risk.
 
This important thing is, even though Chinese stocks are up 23% in just a few months, we still have plenty of upside for one simple reason...
 
Chinese stocks remain one of the cheapest markets in the world.
 
The table below shows what I mean. It shows the Hang Seng China Enterprise Index (the "HSCEI") – an index that tracks large Chinese companies that trade in Hong Kong – versus a few of the world's major stock markets.
 
Any way you look at it, China's largest companies are dirt-cheap compared with the rest of the world...
 
Region
Index
P/E Ratio
Price-to-book
Dividend Yield
USA
S&P 500
17.6
2.7
2.0%
Japan
Nikkei 225
20.0
1.6
1.6%
Eurozone
Euro Stoxx 50
22.3
1.5
3.7%
Hong Kong
Hang Seng
10.8
1.4
3.7%
China
Hang Seng China Enterprises
8.1
1.2
4.0%

China trades at a 50%-plus discount to the U.S., Europe, and Japan, based on earnings. It also pays a higher dividend, roughly 4% today. That's double what the U.S. market pays. But that's not the best part...
 
You see, China is also cheap compared with its own history. It's now cheaper than it was the last two times Chinese stocks soared...
 
Take June 2005, for instance. Back then, the Hang Seng China Enterprise Index traded for around 10 times earnings. That valuation extreme kicked off a multiyear bull market good for 333% gains.
 
Similarly, in October 2008, the index traded for around eight times earnings. Chinese stocks soared 132% over the next year.
 
Sure, shares of FXI are up 23% in just a few months. But from this level of cheapness, Chinese stocks could easily return triple digits from here. It has already happened twice in the last decade.
 
Of course, we can't know for sure if this is the start of the next bull market. But Chinese stocks are breaking out and they're dirt-cheap... compared with their own history and the rest of the world.
 
These two pieces make buying today considerably less risky. Chinese stocks – through the iShares China Large-Cap Fund – are worth considering right now.
 
Good investing,
 
Brett Eversole




Further Reading:

Last week, Jeff Clark gave readers a technical analysis of China's quiet breakout... "This is a BIG DEAL," he says. "This is when new bull markets begin... And early investors could make double-digit gains over the next few months." Learn more here: The Big Breakout You're Not Hearing About.
 
Dr. David Eifrig recently urged American investors to add international stocks to their portfolios. If you do, he says, "you can avoid 'overleveraging' your exposure to the U.S. economy... and also pick up some investment bargains." And Hong Kong is on his list of the best bargains today. To see the full list, click here.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Apple (AAPL)... Big Cheap Tech
EMC (EMC)… Big Cheap Tech
Hewlett-Packard (HPQ)… computers
Western Digital (WDC)… hard drives
Canon (CAJ)… digital cameras
Activision Blizzard (ATVI)... video games
Gilead Sciences (GILD)… biotech
Amgen (AMGN)… biotech
Stericycle (SRCL)… health care services
McKesson (MCK)… medical distributor
BHP Billiton (BHP)… diversified miner
Agnico-Eagle Mines (AEM)… gold miner
ExxonMobil (XOM)… Big Oil
Hess (HES)… Big Oil
Anadarko Petroleum (APC)… oil and gas production
U.S. Steel (X)… steel production
AT&T (T)… telecom giant
Verizon (VZ)… telecom giant
Allstate (ALL)… insurance
Family Dollar (FDO)… dollar stores
Spirit Airlines (SAVE)... discount airline
Northrop Grumman (NOC)… "offense" contractor
Chipotle Mexican Grill (CMG)… burritos

NEW LOWS OF NOTE LAST WEEK
 
GlaxoSmithKline (GSK)… Big Pharma
GNC (GNC)… vitamins
Hershey (HSY)… chocolate
Krispy Kreme (KKD)… donuts
Bloomin' Brands (BLMN)… Outback Steakhouses
Dick's Sporting Goods (DKS)… sporting goods
RadioShack (RSH)… electronics
Sturm, Ruger (RGR)… guns
Credit Suisse (CS)… European bank
Deutsche Bank (DB)… European bank
Arch Coal (ACI)… coal miner

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