Roller-coaster ride is a good way to describe the Shangahi SSE Composite Index.
If you were in it a year ago and rode it up for an exhilarating six months you would've gained 61.5%. That's darn good when you compare it with the Dow Jones Industrial Average, NASDAQ and the S&P 500 which were pretty much flat.
(000001.SS = SSE Composite Index; ^IXIC = NASDAQ; ^DJI = Dow Jones Industrial Average; ^GSPC = S&P 500)
As you can see, the next six months would have wreaked havoc on your stomach. The plunge in the SSE Composite Index reached 39.9%. After the nausea faded you could still say, "Well, OK, but I'm still up more than 40%" and that's a great way of looking at it. But what if you jumped in during November and rode it down?
What has fueled this roller-coaster ride in the SSE Composite Index? It's called the "inflation contagion."
The flatness of the three American indexes reflects inflation already factored in. The same rising prices in oil and food, however, took a while to impact the Asian exchanges.
Inflation has caught up with the Asian markets. Does it make sense to double down for a possible long-term gain?
Before we answer that question, let's take a quick recap of the current Asian situation.
Yesterday, Chinese stocks dropped 8.1%, their biggest single-day drop in nearly 16 months, causing a domino effect in Asian stock markets.
The Hong Kong stock market tanked 4.1%, Tokyo's Nikkei stock market index dipping 1.1%, the South Korean market slipping 2.1%, and the Taiwanese market tumbling 2.5%.
The inflation contagion of the U.S. and Europe was blamed for yesterday's overall decline. It was a continued, strong dose of reality after feverish speculation had driven the Asian markets to record highs in Q3 2007. The Asian markets are down 45% since those heady days.
Returning to the chart for a moment, one thing is clear: over the past year the upside potential of the SSE Composite Index has far surpassed the three American exchanges.
If you believe in the long-term potential of the SSE Composite Index then you also have to believe that it could return to the October highs -- eventually.
Sure the prices of gas and food will continue to hammer the Chinese economy. But China's vast economic potential is far superior to our own sputtering economy. It's also important to remember that the Chinese government is a Communist regime -- meaning the guys at the top don't have to account to anyone. This gives the Chinese plenty of leeway in being proactive against inflation.
China's central bank, the People's Bank of China, announced last week an increase in the proportion of assets that Chinese banks must hold as reserves by a full percentage point. It's the fifth increase this year. China is actively reigning in monetary policy by leaving banks with less money to lend (unlike Bernanke's "refrigerator box monetary policy where he waits until millions of people are foreclosed on and have to move into refrigerator boxes under the freeway).
China's inflation rate is already on the decline. A report last week said inflation dropped to 7.7% from 8.5% in April. Yes, 7.7% is still higher than the 5% that Chinese officials have described as the maximum they can tolerate. And it's nearly twice as high as our own inflation rate.
But what we're talking about here is long-term investment opportunity. When I look at the chart I see enormous growth potential put on temporary hold in China. Compare that to the three U.S. exchanges, and you're looking at three terminal patients on life support.
Here at Taipan Emerging Markets, I keep going back to our roots...
The original Taipans were fearless Scottish and English traders who built their fortunes linking Europe and the Far East. Very much like today's market, there were storms, pirates and crooked politicians.
If you have the heart of a Taipan, you would seriously consider doubling down on the SSE Composite Index. If you're not currently in the SSE Composite Index, then maybe it's time to hoist the sails.
--Irwin Greenstein
