4 Reasons Why Now is NOT the Time to Invest in China’s Stock Markets – All Bubbles Come to an End
Reason 1: All bubbles come to an end
(note: four is an unlucky number in Chinese, as you probably know, and that’s why I chose it)
Imagine for a moment that you were blind enough to buy in to technology stocks at the upper reaches of the tech bubble… on margin. Convincing yourself that there is nothing to worry about, you hold on until everything is gone.
In China, this scenario is playing itself out almost exactly to the letter. Countless numbers of Chinese people have taken out additional mortgages on their homes, borrowed money from friends, or even engaged in credit card cash schemes just to get more exposure to China’s raging stock markets.
While most investors looking at China’s stock markets from the outside know there is a bubble, there are still many who recommend ‘diversifying’ into many emerging markets around the world, including China’s. That’s just a mistake.
Diversifying my donkey
(you know what word should be in the donkey slot above) Intelligent diversification is not done by investing in anything and everything available to you. One situation you should avoid investing in like the plague is throwing your money into a bubble. Bubbles have obvious symptoms, and at some point they deflate faster than anyone floating mid-air inside of the bubble think possible. Don’t diworsify, diversify. Putting your money into most companies in China right now is just a form of diworseification.
The Bigger the Bubble, the Larger the Pop
Based on a back of a napkin type calculation, it looks like Chinese stocks are selling for about 35 times reported earnings on average right now. While this is still a ways off from the peak Nasdaq price to earnings (when times were still good and earnings hadn’t turned negative – ie before the crash was already well under way), 245 (warning: PDF reference), it is not exactly a pretty number for a country where reported earnings are often heavily manipulated, or where many of the earnings of public companies are from trading in the stock market.
So What if China’s Stock Market Bubble Could Get Bigger – It could also Explode Tomorrow
You should in no way doubt that the bubble in China could get bigger, based on the above comparison. Yet the bigger it gets, the more dangerous its consequences when it finally does pop. And it’s already risky enough. The Chinese government fully understands this, as will be better explained in the next post in this series. Suffice it to say, however, that the Chinese government has more methods to keep the bubble from getting too big than it does for preventing it from popping.
What are some of your thoughts for why China’s stock markets are or are not in a bubble? Please help out below! Otherwise, the next post in this series will be forthcoming next week sometime.