I’ve been reading a research report produced by Merrill Lynch a week or so ago. It’s got a phrase in it that pretty much sums up the point of our cover story this week. “Valuations,” say the authors, Mark Matthews and Willie Chan, “shouldn’t be looked at too closely at the moment, because they won’t give the right sense of direction for the (Asian) stockmarkets.”
Usually when stocks are unjustifiably expensive on traditional measures (as the likes of China are now), market analysts waste endless hours thinking of complicated ways to bamboozle their clients into thinking that silly prices make sense. In Japan in the late 1980s, we were told not to bother with looking at p/es – they didn’t measure the correct thing – but to look at enterprise values and at the potential market price of the property owned by any given company. A decade later, p/e ratios were forgotten again as we were told to concentrate instead on eyeballs and burn rates. But Matthews and Chan – rather admirably – aren’t bothering with any of this imaginative mathematical muck. Instead, they just say you should buy Asia because everyone else is buying Asia.
Domestic buyers are pouring in (“as their capital markets deepen and their economies grow, China and India have developed a taste for stocks, something we will not see replicated on such a scale again in our lifetimes”) and foreigners are splashing their cash about just as freely.
In India they already own 45% of the freely-floating shares and have put another $6bn net into the market since July alone. This is a trend likely to continue for the simple reason that most investors can’t really think of anywhere else to put their money. They look at the US and see an ailing economy caught in the grip of a collapsing housing market and an ongoing credit crunch. Then they look to Asia, where they see GDPs growing at 10% a year, markets moving 20% a month and enough good economic stories to justify almost anything.
Value investors should probably get out now (you won’t catch Warren Buffett buying Chinese bank stocks this year). But if a bubble is building in China and India (it probably is), speculators have good reason for staying in. Those who think paying 20-plus times earnings for a basket of Indian stocks is silly might remember that Japanese stocks peaked on an average p/e of over 70 times in 1989 and Taiwanese stocks hit an insane 100 times in 1990. China and India have a long way to go before they even begin to match those.
All that said, we do want to point out that when bubbles end, they usually end in tears, so if you’re going to participate in this one, don’t put too much money in and don’t be too greedy either. Valuations may not matter now, or even next year, but they always do in the end and we’d prefer it if the tears weren’t those of MoneyWeek readers.