Fisher: China’s Bear Market Isn’t a Crisis — It Is an Opportunity

What a great time to buy Chinese stocks! No, I haven’t lost my mind, though Western pundits would surely say so. Today many of them claim China’s market is “uninvestable,” with recent regulatory overhauls and sinking shares implying too much risk. Wrong! Chinese stocks offer a stake in your country’s still-stellar long-term growth potential—now at a steep discount, thanks to recent declines. Yes, this bear market may sting in the short run. But take a longer view to see China’s bear market for what it is: a beautiful opportunity, not a portfolio-crushing risk.

China’s long property boom and nine equity bear markets since 1994 may make stocks seem risky and speculative compared to the real estate holdings underpinning most Chinese investors’ wealth. Besides, owning property seemingly gives investors a tangible stake in China’s long-term economic development. Stocks may look fragile by contrast, swaying moment to moment — often wildly.

But such views miss what stocks truly are: ownership in the businesses so integral to China’s development. Don’t view them as pieces of paper or ticker symbols flashing “up” or “down” on a cellphone or computer screen. See them as claims on a company’s future earnings — a sweet slice of its growth. Dividend payouts, new revenue streams, one-time windfalls — a stock gives you a cut of all of those actions.

Yes, stocks can be volatile in the short term. But collectively and over the long haul, they reflect broad economic and corporate trends and developments. New technologies and medical advancements, innovations revolutionizing how we communicate, ideas that squeeze more productivity out of existing resources — stocks tie your portfolio to these opportunities. Hence, a diversified portfolio of Chinese stocks isn’t like betting on a list of symbols — it is participating in China’s long-term growth potential.

Recent news doesn’t change that. Outside America, China offers more access to big growth firms than anywhere, thanks to the Tech giants driving your “new” economy. Yet even with a shift toward Tech and service-centered businesses, China still accounts for 28% of global manufacturing output, leading the world—by far. Owning Chinese stocks means you benefit from the ingenuity and resources driving this diversified growth.

Western pundits can’t see that. Instead, they view recent stock market declines as a sign of things to come — and a reason to avoid China’s markets altogether. They shriek of cascading defaults spreading far beyond Evergrande and draconian Tech regulation lurking just around the corner. Don’t mirror their myopic freak-out. Instead take advantage of their wrongness by buying what they sell.

Pundits nearly always succumb to pessimism later in bear markets. Yes, Chinese stocks are down around 30% since February. But even short-term growth prospects remain attractive. Corporate earnings should rise over 20% next year. Gross domestic product should climb 5.5% — topping the 4.9% the International Monetary Fund expects globally. Fast growth doesn’t ensure big equity returns. But when you consider this bear market has many Western pundits yet again fearing a hard landing, you can see the potential for positive surprise — which markets love — is strong.

Could property market troubles spread, further denting short-term growth? Maybe! But worldwide hype over Evergrande’s woes means markets have already pre-priced deeply dour expectations. And, even if Evergrande fails, it doesn’t mean your government won’t limit fallout by protecting suppliers, workers and customers. Beijing is already signaling it will protect consumers and healthy developers while pushing banks to ease credit for homebuyers.

History suggests the worst of the plunge may be behind us. Since 1993, the median peak to trough decline of China’s eight previous bear markets was -52%. Yet these are skewed by massive bears early in China’s development. Since 2008’s financial crisis, Chinese bear markets had a median return of -33.8%. At its lowest to date, this bear market hit -32.8%. After those eight prior bottoms, stocks soared. The median return three months after the lows: 27.4%. Six months after the bottoms? It was 43.9%. Look no further than 2020’s flash bear market for a prime example. After a -20.3% decline from Jan. 13 to March 19, Chinese stocks roared back — fast. Three months after the low they were up 36.6%. Six months after bottoming, they’d gained 44%.

History offers no guarantees. But avoiding stocks now risks missing out on the powerful bounce-back gains that new bull markets bring — gains you can’t ever recoup. I have no idea where this bear market’s exact bottom is — no one can pinpoint that. Stocks still could fall somewhat further. But in my view, the upside now far outweighs the downside. If you are already invested, hold on. Have cash? Now is a great time to grit your teeth and buy.

The dramatic — often negative — day-to-day volatility that bear markets’ final stages typically bring makes that hard to do. Many investors wrongly see those frequent fluctuations as proof real estate is safer than stocks. But for investors, opacity is actually a negative feature. You may not see an investment property’s price swinging from one day to the next. But with home sales tumbling 20% in August alone, are prices likely to remain stable? Especially with troubled developers selling assets to raise cash fast after the government’s implementing “three red lines” and other rules to limit debt and cool home prices? Unlikely!

With stocks, you get a clear gauge of value on a minute-to-minute basis. That doesn’t mean you should be acting on those swings in real time — far from it! But stock markets’ depth and liquidity give you the price transparency needed to adjust your allocations fairly easily when you want.

And if you see a big negative that others are missing, you can sell stocks quickly — and with minor costs. Real estate? Good luck.

Now isn’t the time to sell stocks, though — it is just the opposite. Today’s negatives are blatantly blaring in headlines from Fuzhou to Florida and everywhere in between. Pundits’ panic has pre-priced doom, teeing up the positive surprises that come at bear markets’ darkest depths. The bottom might not come today, tomorrow, or next week. But it likely arrives before most investors expect it to. Make sure you are positioned to ride the supercharged V-shape start when it comes.

Author: Ken Fisher is the founder and executive chairman of Fisher Investments, Caixin Global