China’s Shanghai composite index has lost 50% of its value from just last fall, indicating the strength in Chinese securities is waning and investors are moving back to developed markets. It is hard to keep a good investment down, however, as Chinese growth is some of the highest in the world and offers significant investment opportunities.
The 50% downturn is important not just for psychological reasons or fundamentals, but also because 50% is one of the key retracements on a Fibonacci analysis line. Fibonacci analysts place much emphasis on 23.6, 38.2, 50, and 61.8% retracements; these are seen as key support levels for various investments and securities. For the market to fall this low, Fibonacci should suggest a turnaround.
Speculative investments go home
The run of funds also shows that hedge fund capital and speculative investment money was pulled from overseas and back to domestic accounts to cover losses in developed nations. As the US economy took a downturn, it is likely that Chinese growth stuttered slightly and US investors took equity out of developing nations to cover diminishing investments back at home.
There is much to be excited about in China. The country has shown its ability to grow by posting double digit growth rates and boasts a thriving currency. The exchange rates might soon move out of favor with foreign buyers, but the domestic environment remains strong. Automobile sales and other luxuries are doing fine, even with the stock market tanking. We can only assume that things are alive and well on the domestic side, even though speculative investors have taken a hands off approach to China.
Weather affects mining industry
Snowstorms and other events have slowed the mining and refining of metals, which fuels China’s growing manufacturing industry. Higher prices means smaller profit margins and a weaker economy. Though these events are mostly due to a seasonal change, they have some investors worried. Long term prospects remain unchanged, further proving that a rebound is in the future.
This creates a very opportune time to buy. Chinese stock index funds are selling on the cheap and should be considered for any investor wanting more exposure to a developing nation. At a 50% discount to the 2007 highs, China looks very cheap. PE ratios are now much lower than they were just a few months ago, and growth prospects are still on track. Indeed, it may be time to stock up on some Chinese index funds.