Don’t give up on Chinese stocks yet…
As I’ve been writing, there is no question that the Chinese economy is slowing down. But its economy is changing as well. China is moving from a manufacturing-based economy to an acquirer of strategic world assets.
Last week, Germany’s Chancellor Angela Merkel visited China in the hopes that the country would help Europe through its crisis, by investing in the eurozone. The eurozone is the Chinese economy’s largest export market, so it is certainly in China’s interest to ensure it helps its biggest customer. The historic trip by the Chancellor of Germany, Angela Merkel, to China (and not the U.S.) is evidence that China has the money.
The Chinese economy is not only the manufacturing engine of the world, but it is actively (and smartly) seeking to purchase intellectual property, patents, and know-how.
China’s way of achieving this is by making strategic acquisitions. Where countries in Europe refused them in the past, now because of the crisis, these same European countries are embracing China because of the need for cash. This is now translating into deals for the Chinese economy that would have been unheard of even 10 years ago.
Is it a coincidence that Chancellor Merkel’s visit occurred in the same week that China made its largest purchase of a German firm yet?
China’s Sany Heavy Industry, a direct competitor to Caterpillar Inc. (NYSE/CAT), purchased Germany’s concrete pump maker Putzmeister Holding for an estimated €360 million. This mid-sized engineering firm is a prized jewel for the Chinese economy.
Last week as well, the State Grid Corporation of China acquired a 25% stake in Portugal’s national power grid, with the promise to invest €1.4 billion in the firm. Portugal was forced to sell part of its national power company in order to meet the terms of its bailout package from Europe. Another coup for the Chinese economy.
In December of 2011, China’s Three Gorges Corporation acquired a 21% stake in Energias de Portugal, Portugal’s largest power company, in a deal worth €8.0 billion.
China’s state-owned utility company, State Grid, which already owns transmission assets in Brazil and the Philippines, paid a 40% premium to own 25% of Portuguese utility firm REN. As part of the deal, State Grid becomes a strategic partner with REN’s expansion into Angola and Mozambique, benefiting the Chinese economy.
Italy’s highly indebted Ferretti Group, the world’s largest luxury-yacht builder, was sold to China’s Shandong Heavy Industry Group, in January of this year. With so many more millionaires being created as a product of the Chinese economy, Ferretti is looking to expand into China.
There is no question that China is using the money it has to purchase key distressed assets in Europe. Europe’s need for investment will ensure that China gets the companies and assets it wants. These purchases will help solidify China’s place as the next superpower in the world and will, in turn, return some very healthy profits for investors in the intermediate to long term.
Where the Market Stands; Where it’s Headed:
The bear market rally is playing out exactly like it should. Slowly, more and more people are turning bullish on the economy and the stock market. The Dow Jones Industrial Average continues its slow path towards 13,000. It’s picture-perfect for a bear market rally.
In March of 2009, a bear market rally (a classic Phase II of a bear market) was born. The purpose of a bear market rally is to lure investors back into stocks before the market moves back down with a vengeance (Phase III of a bear market).
What He Said:
“Why Google stock will go higher: Most investors in Google, surprisingly, are retail investors. And that’s why the stock can go higher—because only 20% of the stock is owned by institutions. If the institutions jump in and buy Google, the stock will certainly move higher.” Michael Lombardi in PROFIT CONFIDENTIAL, June 2, 2005. Michael recommended Google stock as a buy on June 2, 2005, when the stock was trading at $288.00. On November 5, 2007, when Google reached $700.00 U.S. per share, Michael advised his readers to sell their Google stock and to put the proceeds into gold-related investments. Coincidently, gold bullion was also trading at about $700.00 per ounce in November 2007. Michael’s message was to trade each $700.00 share of Google into $700.00 of gold, because he saw gold as a much better investment.