Will China contagion infect the U.s.?

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BIGGER NEWS THAN GREECE OR PUERTO RICO

The Chinese stock bubble popping, their economy slowing and China using less resources…that’s a pretty big deal. These things will impact economies, markets and companies.

HOW IMPORTANT IS THE CHINA BUBBLE?

It’s actually a lot less of an impact on U.S. investors than the media lets on. First of all, the major bubble is in “A” shares which American investors can’t even directly own. Those indexes have dropped over 40 percent.

As a comparison, the largest China ETF (exchange-traded fund), the one most U.S. investors would have, has only dropped about 20 percent. The fund is called iShares China Large-Cap (symbol: FXI). It dropped but only half as bad.

This stock run-up, and drop, was mainly caused by heavy margin buying. Chinese investors are accumulating shares with debt, encouraged by their government to do so. The government was still encouraging it during the plummet.

Leveraging like that can be very dangerous. Especially in an over-valued market. The price and euphoria reminds me a lot of the Tech Boom…and Bust. Even the P/E ratio is similar, a little over forty. This is very high for any major index. The higher this climb, the more over-valued the shares, the harder the drop will be.

CHINA IS BEGINNING TO EXPERIENCE AN ACTUAL “NEW NORMAL”

Bill Gross should be happy now. There is a dynamic economy experiencing his vaunted new normal. It’s just not the U.S. like he predicted. It’s China having the slow-down. The government even conceded, in their estimates, that the economy will “only” grow at 7.5% a year for the near future. This is lower than their previous double-digit GDP growth.

MORE AMERICAN COMPANIES EXPERIENCING REVENUE DECLINES

Besides the weakness in commodities like copper, which China is the largest user of, there are many drops in multi-national company sales. Not all of it’s caused by the overseas slowdown but it must be impacting revenue somewhat.

There could be opportunities in natural resources, China and other Chinese “plays” like Australia. I haven’t fully looked into these yet but, if the drop continues, it could make those investments more attractive. And I certainly wouldn’t bet against this giant economy for the long-term.

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The 9th Largest World Economy Is On Sale

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What if you could buy the ninth largest economy at a discount of over 35% of book value (Investopedia.com describes book value as: “…the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.”)? An economy that propelled the average monthly pay from $80 in the year 2000 to $967 in 2013, has unemployment of only 4.9 percent and a GDP per person of $14,818.

The capital of this country has repeatedly been called the “billionaire capital of the world” by Forbes. This country has 144 million people, spans nine time zones and is rich in natural resources.

I’ve recommended to many clients to have a 2-4% allocation to this country and I just purchased some of this countries’ index for my personal investments, too.

What is this country? Make sure you’re sitting down when you read this. If you haven’t already guessed, the country is Russia. I know, I know. Aren’t they doing crazy things like annexing countries? Yes, they are. Don’t they have an uncontrollable, quasi-dictator? Yes, but…

FamousĀ 18th century financier, Baron Rothschild, said “The time to buy is when there’s blood in the streets.” In other words, buy when everyone is afraid and selling. While the Russian economy is no U.S. economy, if you’d have bought the Dow Jones at its recent weakest (March, 2009) it would have almost tripled. The DJIA was then about 6,500 and is now over 17,400, closing as high as 18,024 last December.

This is a risky category and should only be a small part of an investors money but could have significant upside.

The Russian mutual fund I use has 29 investment holdings, access to about 85% of their stock market, a forward P/E ratio of 4.54 (low is good) and a 12-month trailing yield of 6.07 percent. If you’d like more information you can email me at RonPhillipsAdvisor@gmail.com or call me at (719) 545-6442.