“Dear David, This article appears today in Bloomberg, I have heard in your audio that China is cheap at these prices and a portfolio diversified in different Asian countries could be interesting to have since Europe is not looking good and USA is not cheap. What are your thoughts after reading this article?http://www.bloombergview.com/articles/2014-09-15/bad-loans-could-bust-china

David Fuller's view

Thanks for an email certain to be of interest to other subscribers, and also for the article.

All countries go through difficulty phases which can derail their stock market performance for lengthy periods.  However, China has the best 40-year growth rate of any large country, and is now the world’s second largest economy, but it also has some king-sized problems.  That is why the valuations are so attractive. 

Personally, I can live with some significant risks if I can buy a developing economy cheaply, especially when governance appears to be improving.  I think that is the case with China today.  Moreover, after a retrenchment period during which some of the worst problems of corruption and pollution have been partially addressed, China’s government has begun to stimulate the economy once again. 

Inevitably, others see China differently and a clear consensus is a contrary indicator which usually occurs after the event.  I am not trying to talk you into buying China or Hong Kong, but these are part of my major investments.  You can still buy attractive valuations in Japan or Vietnam, and yes, they also have some problems.   

You may have seen Eoin’s fascinating report on Charlie Munger’s 2-hour Q&A session at the Daily Journal AGM, which he attended.  Here is a brief section on China:

“He mentioned China as a clear example of a place where things have gotten better very quickly. Rather than do it on debt China has earned its way to prosperity by saving and by making sacrifices we, in the West, weren’t willing to. He was of the opinion that people sitting in a developed country working a 36 hour week shouldn’t look down their noses at the rise of emerging markets or get uneasy about increased competition. The rise of China, like Japan before it, represents a major upheaval and of course there are going to be necessary adjustments.”