Tuesday, September 25, 2007

On China and risk repricing in the India subcontinent

It’s not hard to figure out why China might be a sector to avoid.

Jim Rogers, the perennial China bull, at the beginning of the year, had said that if China doubles this year, he would sell his holdings. That’s exactly what China has done so far
A PE ratio in the 50’s is certainly a recipe for disaster. Won’t surprise me if Rogers has already sold out. When would the Chinese bubble prick? No one knows. One would think that the market will keep going up as long as the Chinese investors feel optimistic. Have faith, is their new mantra.

Faith. A new paradigm. A permanently higher plateau, we’ve seen this all before.

A collapse of this market will surely have repercussions in stock markets around the world. But how exactly do you time this?

Are Chinese investors safe till the Beijing Olympics? Can the market double from here? Hitting a PE of 100 maybe? Bubbles tend to last longer than you can remain solvent. Opening up Hong Kong to the mainland investors is a good move, but only delaying the inevitable in my opinion.

Emerging markets: one doesn't see the point of investing in emerging markets, with their higher PEs. We need risk premium dammit!

Today, you can invest in the US and Europe with their reasonable PE ratios. There needs to be a risk adjustment in their valuations, regardless of their ‘growth fundamentals’. Let’s not forget, the Communist Party of India is still in the alliance at the center. The possibility of them screwing things up is just very very high. These are exactly the same guys who banned multinationals from India in the 1970s, relegating India to the ‘Hindu rate of growth’. Their recent posturing on the nuclear deal is a good example of their potential nuisance. India needs nuclear power if they have to maintain their growth rates. If CPI succeed, the growth prospects of an infrastructure constrained, energy constrained, and corruption constrained India would surely need to be revised down.

The risks in India are under appreciated. A reprising of risk in the Indian subcontinent is due.