How did yesterday’s legislative shock in Washington impact the rest of the world?
From North to South, and East to West, the response was severely negative. But there’s an underlying truth about value being revealed in the U.S. right now, and it’s pointing us to big profits in Chinese financial stocks.
You see, Wall Street investment bankers got too crafty with credit. But in China, organic growth is still the main driver of corporate earnings. Leading indexes in Greater China (which includes Taiwan, Singapore, and Hong Kong) are way down off highs one year ago, and Chinese banks are going to lead the surge back up… especially as U.S.-based investors increasingly look beyond Wall Street and Washington’s games.
Let’s break down the scenario we see heading into October ’08.
Every major market in the Asia-Pacific region plunged Tuesday morning in their first chance to respond… as did indexes in Europe and South America, where Brazil got walloped with nearly a 10% decline.
In Europe, the three Benelux countries (Belgium, Netherlands, and Luxembourg) are now joint partial owners of Fortis bank, bought for over 11 billion euros. That came on the same day Wachovia went down, selling its banking assets to Citigroup and continuing domestic consolidation as sub-prime sinks one established institution after another.
We also saw the end of a medium-sized bank in northern Britain, and down in London the key lending rate between banks around the world (LIBOR) soared to the highest rate in seven years.
That movement in credit spreads in Europe’s financial hub is creating a ripple effect on the other side of the Atlantic that will drive interest rates higher and terms tighter still.
Just like the VIX volatility index based in Chicago, LIBOR levels are a major measure of market unease. When these are up, investors are biting their nails to the quick… And right now, the VIX and LIBOR are through the roof.
But on Tuesday morning, the Dow went back up by over 200 points on open, seeming to reflect optimism that close to the same deal everyone was so certain about early on Monday will indeed get voted through later in the week.
So, should you be optimistic about the outcome of this chaos?
If you’re in China, the answer is yes.
‘Bank’ on China Financial Stocks To Benefit from the Bailout
German daily Die Zeit pointed out today that 3 of the world’s top 5 banks are now in China.
You could chalk that up to attrition, since big Yankee banks like Wachovia bit off much more bad debt than they could swallow (or at least convince you they never had).
However, you must also recognize that there’s something different about China’s financial giants like Industrial and Commercial Bank of China, which in October 2006 debuted as the biggest IPO in world market history. ICBC is now the bank with the biggest market cap in the world, but it is only listed in Hong Kong and Shanghai.
You can buy ICBC H-shares (Shanghai equities are off limits to foreigners) through E-Trade and other international brokerages under the ticker number 1398.
ICBC, along with the other three of the Big Four of China (Bank of China, China Construction Bank, and Agricultural Bank of China), enjoys the overt support of the Beijing government.
When ICBC was preparing to list, the Communist Party’s various monetary mechanisms helped sweep nearly $20 billion in non-performing loans off the balance sheet with a $162 billion package to help get the bank ready for game day.
That was a back-end move that made markets happy. Compare that to the sloppy clean-up Washington has tried to orchestrate, but which might be making more of a mess.
So take a guess as to where ICBC is today compared to the broader American market, and compared to financials, in particular…
The SPDR Financial Select Sector ETF (NYSE:XLF) has dropped nearly half of its value over the past year, and the Dow is down by over 20%. ICBC has outperformed those, and it’s beaten the benchmark Hang Seng index in Hong Kong too.
Here we see ICBC in blue, the Hang Seng in green, and way down there in red, XLF.
The reason, simply, is real growth. Chinese consumers haven’t yet gotten addicted to credit, and neither have their banks.
Double-digit GDP increases in each of the past several years and consistent foreign direct investment (FDI) are darn near the inverse of the U.S. domestic economy, where corporate xenophobia rules and the only growth we’ve gotten recently came from concocted credit products that turned out to be worth nothing (or at least of very uncertain value).
So if you’re like the majority of developed-market investors and you’re pulling out of emerging markets first as you retreat to safety, think about where the real value is in today’s market. China, Indonesia, and other countries have built-in momentum from growing consumer bases and spending that is fueled by savings, not overreaching credit.
The iShares MSCI Hong Kong Index ETF (NYSE:EWH) gained 5% on Tuesday. We’re looking for a solid uptrend there to buy into supercharged gains in one of Asia’s most stable equity markets for growth.
Keep an eye on that fund and other international ETFs for superior growth in 2009.