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SOVEREIGN MAN

It’s as easy as buying an ice cream cone…

JureHongKong

December 5, 2012
Hong Kong

[Editor's Note: Sovereign Man Chief Investment Strategist Tim Staermose is filling in for Simon today.]

Since 2009, the benchmark Shanghai Stock Exchange index has been in a deep funk.  Last week, in fact, the index hit 4-year lows and dipped below the psychological 2,000 level.

Further, a recent survey of 8,438 Chinese households published by China’s Southwestern University of Finance and Economics found that 77% of those who had invested in Chinese stocks lost money.

This is huge. Chinese retail investors account for around 80% of the transactions on domestic exchanges. Famous for being active traders with investment behavior bordering on gambling, Chinese retail investors are now completely disillusioned with the market.

According to JP Morgan, as of the end of October 2012, 44% of all Chinese stock trading accounts had been dormant (i.e. without activity) for at least a year.  At the end of 2007, the comparable number was just 2%… an enormous difference.

These are the sorts of data points that contrarians love. Whenever the retail crowd runs loses interest in investing, it generally suggests that the bottom is in. Today, China fits that bill.

Bear in mind, there’s probably no rush to buy.  Most successful investors usually wait for an uptrend to commence, and then buy in.

I’ve put several Hong Kong-traded Chinese stocks on my watch list and started accumulating shares. All of them are in the Chinese consumer sector.

The Chinese government has announced dozens of times that they are committed to promoting consumption-led economic growth going forward, so this seems like a safe place to start… much safer than infrastructure companies that build empty cities and bridges to nowhere.

And it doesn’t hurt that many of these consumer sector companies pay double-digit dividend yields, and have tons of cash on their balance sheets.

Now, I’m not a big fan of ETFs; they’re generally inefficient, costly, and fail in their core mission of tracking a particular market segment. But they do offer convenience to retail investors. So if you’re an ETF investor, the Global X China Consumer ETF (CHIQ) is an easy way to invest in a diversified portfolio of Chinese consumer stocks.

If you’re interested in purchasing directly, you could open an account with Boom Securities in Hong Kong. Boom allows direct access to Chinese “B shares” plus all Hong Kong stocks. And they do open accounts for foreigners.

As one friend of Simon’s recently remarked, opening account at Boom Securities was as easy as buying an ice cream cone. Except that you don’t have to pay anything.

About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

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