Earthquake stuns Chinese market – but creates new value

Chinese Earthquake

US investors fearing the worst from a recent earthquake made their worries apparent. The Chinese ADR index, which tracks Chinese stocks listed on American exchanges, dropped to its lowest level in two weeks on fears that the earthquake stricken areas are likely to suffer economically as well. While the short term implications are that there will be some lost revenue, China still has plenty of value.

News causes the market to move

Investors believed that the Chinese earthquake devalued many of the companies listed in the general ADR index. The whole process occurs in three stages: the initial development shocks Wall Street, further news drops the price, and then a gradual upswing brings the index back to par.

A similar pattern

In almost all news driven market events, the same pattern occurs for valuing the investments affected by the news releases. The initial shock of the markets has already been seen with a slight sell off of the ADR index to settle at 501.46. Investors have already priced in their worries that an earthquake has created some financial loss – even without substantiating further news.

As the news rolls in of damage reports or injured people, the ADR index is likely to continue to fall. Though the earthquake has already been priced in based on investors' preconceived notions, it is likely that the market will again correct as more news is released. Even without further negative news, investors will look to sell the ADR because in the markets, any publicity can be bad publicity.

Next, stocks enter a recovery, fed either through profit-taking on shorts or bottoming where investors find value. The next few weeks yield modest week by week gains that seemingly recover most, if not all, of the downturn and sometimes a little extra. Traders who were afraid of the damage toll will slowly buy themselves back into the market and as such, push up the price. The recovery period is the longest part of any news release sell off.

Still reason to invest

At any rate, the earthquake in China unlikely has any long-term financial effect. The short term will be filled with cleanup and possibly slow some economic development, but shouldn’t impact long term value. For the investor interested in Chinese markets, a new value play should emerge as the long term prospects have been undervalued by the actions of the short term traders.

A rebound from here is likely, but only after the negative news reports cease from the earthquakes center. There is still much to be learned about the earthquake, including important information on the total damage and economic loss of the area. As each subsequent damage report follows, we can expect a minor sell off, as natural disasters cannot be easily compared to estimates. Unlike economic data where investors act differently when data looks better by comparison, there is no way to compare damage to possible damage.

Get in for cheap

There is still plenty of value in China even after its fall of nearly 50% from just last fall and after an earthquake has threatened to hurt many businesses. From here on out, it should be advised that the long term Chinese trend is up, even if the news does not think similarly.

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