Kennedy Act and Investing in China

Forbes presents a good overview of what the Kennedy Act is all about and how it fits into the scheme of both individual investments and USA-China relations. Their article refers to The China Hustle.

There are two issues that Forbes points out. The first for individual investors is that many Chinese companies are “black boxes” which provide insufficient (or no) financial data. As such investors get sucked into investing in story stocks and lose their money.

The second issue which is at the heart of much of today’s thinking about China is that American investors are investing billions of US dollars to help Chinese companies. Some of that money is lost to bad investments. But, worse than that, much of that money goes to improve the competitive advantages of Chinese companies that take business away from American companies in Asian markets as well as in the USA.

In a perfect world, the Chinese would be doing the same in reverse. But, they aren’t.

Chinese investors are not returning the favor. They are not permitted to invest in Apple AAPL or Disney DIS or the latest 5G tower REIT.
American money goes to China. China money doesn’t come to America. Not because the U.S. doesn’t want it, but because China doesn’t allow it.

The official name of the proposed Kennedy Act is the Holding Foreign Companies Accountable Act. The goal is to demand that companies provide adequate financial information or not be listed on the NASDAQ or New York Stock Exchange. If the law goes into effect, Chinese ADRs will have to submit to third party audits to be listed on US exchanges.

What Else Is Affecting Investing in China?

As Forbes notes, the move to go after Chinese companies that do not comply with SOX is being further stoked by the ongoing trade war and anger over the lack of information coming out of China in the pandemic. There is a high level of disbelief in China’s reports of a relatively low number of infections and deaths from covid-19 when countries with advanced health systems such as in Europe have reported greater numbers.

This adds to the long-standing doubts about the validity of information coming out of China and the risks not only of investing in China but of doing business with a nation controlled by its Communist Party aristocracy. Investing in China has always been driven by the wish to get into a 1.2 billion-person market. Unfortunately for investors outside of China, China has blocked many companies from competing there, stolen business and technical secrets, and made “sharing” of technical knowhow a prerequisite to doing business in the land of controlled capitalism.

Thus we see movements on multiple levels to “decouple” from the current business relationships with China from the USA, the EU, Great Britain, and the democratic nations of Asia. China’s crackdown on legitimate protests in Hong Kong is simply adding fuel to the fire.

Forbes notes the likelihood of more investments into the Korean, Taiwanese, Japanese, Indian, Vietnamese, and Indian economies in Asia as well as greater investment in countries like Mexico and Brazil in the Western Hemisphere.

Effects of the Kennedy and Investing in China on Your Investments

Companies like Alibaba are already getting listed on the Hong Kong exchange to allow western investors access to their shares. We can see a lot more of that if the Kennedy Act takes hold. China’s economic miracle is cooling off but the country is not going to fall into an economic abyss. If you want to stay invested there that may still be possible if you are willing to work through other stock exchanges. But, foreign direct investment in China is likely to steadily decrease as the “anywhere but China” movement takes hold.

Kennedy Act and Investing in China – Slideshare

Kennedy Act and Investing in China – DOC

Kennedy Act and Investing in China – PDF

Will Trump Delist Chinese Stocks?

Reuters reported the possibility of delisting and the fact that U.S. investors have billions at risk in Chinese stocks.

U.S. fund managers, especially, are heavily invested in Chinese stocks, which is what worries the folks at Reuters. But regular investors may hold ADR shares of Alibaba or JD.com. Will these companies end up listing on other exchanges and will U.S. investors follow them? The suggestion of delisting may be just a game of “chicken” as part of the trade war.

Risks of Investing in China

But, other risks are real. China’s economy is slowing down and the Chinese Communist Party is not taking the steps needed to liberalize, give up central control, and move away from its export-dominated model. Their level of debt is high and is growing rapidly. The collapse of the 1980s Japanese economic miracle comes to mind. There is evidence that Chinese policymakers are studying what happened when Japanese debt situation made their economy implode and go into thirty years of stagnation.

If China ceases to grow at its former pace or has an economic hard landing, which stocks in China will be hurt and how should you adjust your investments in that market? Alibaba may have had the benefit of a lot of hype when it got started but it seems to be well-diversified and active in the growing internet-sales niche. This may be your safest bet if you stay with a Chinese stock. But, what happens to your ADR shares if delisting occurs?

What Is Really Happening in China and How Does It Affect Your Investments?

For years the baseline concern about investing in China has been the concern that economic numbers have been fudged and that the government publishes data that it wants investors to see and not data that could help investors direct their investing. That will probably not change in the near future.

For the time being, the threat to “delist” is probably just a threat. But, if the trade war really does become permanent, you can expect to see delisting of Chinese stocks and a lot more. But, at that point, you will invest a greater portion of your portfolio in US stocks, as will Chinese investors who have pulled their assets out of China.

Toronto Dominion (TD)
Royal Bank of Canada (RY)
Scotiabank (BNS)

These are the three largest Canadian banks.

New banks are rare in Canada because the regulatory hurdles are so difficult to go over. This also makes Canadian banks, as a group, safer than U.S. banks. In the last century, while tens of thousands of U.S. banks have failed, only three Canadian banks have gone under! Of all the Canadian banks, Toronto Dominion is considered the safest.

Canadian Bank Stocks

The three Canadian bank stocks we have in mind are all dividend stocks. While you may think that these stocks are not great growth opportunities, that is not correct. This graph from Seeking Alpha shows investment portfolio returns for these three banks going back twenty-three years.

Not only are these bank stocks safe investments due to strict Canadian banking regulations but investing in Canadian banks can be very profitable as well.

Investing in Toronto Dominion Bank (TD)

Toronto Dominion was formed by the merger of Dominion Bank and Toronto Bank in 1955. Those banks dated back to 1869 land 1855 respectively. Today TD is the largest Canadian bank by total assets, one of the top ten North American banks, and the 26th largest bank in the world. Over the last two decades, the bank stock has gone from the $2.50 range to the $75 range and its current dividend yield is 3.89%.

(Google Finance)

Investing in Royal Bank of Canada (RY)

Royal Bank of Canada is the largest in the country by market capitalization and is always around the fiftieth largest bank in the world in yearly ratings. RBC was founded in 1864. Two decades ago this bank stock traded in the $6.60 range and today trades at $105. Its stock has a dividend yield of 3.84%.

(Google Finance)

Investing in Scotia Bank

The Bank of Nova Scotia was founded in 1832 and operates under the name of Scotia Bank. It is the third largest bank by deposits and market capitalization. Two decades ago this stock traded at about $10 a share and today it trades at around $55. Its dividend yield is 4.77%.

(Google Finance)

How Canadians Invest in Canadian Bank Stocks

Many savvy Canadian investors have the same preferred length of ownership as Warren Buffett, which is forever. They simply wait until the bank stock price slips a little and then buy a little more. The approach has served many Canadian investors very well for many years.

Seeking Alpha touches on this subject in an article about Canadian dividend stocks.

It’s a strategy that many Canadians employ with the big Canadian banks – buy the worst performer. Wash and repeat.
I took that approach at times with my Canadian banks and my other holdings.
We might see an immediate and more generous income boost and the potential for a greater long term total return boost.
When we have a group of quality holdings we might use that value hunting approach as a consistent strategy.

The author goes on to explain his approach of using P/E ratio, stock price, and dividend yield as guides for when to buy more of these bank stocks.

Timing Canadian Bank Stock Purchases

We have written about the perils of buying cheap stocks recently in our article about choosing undervalued investments. The risk of buying a stock when it is down is when the stock price is down for a good reason and will likely fall even more. Investing in Canadian banks helps reduce this risk as the banks are highly regulated and in the last century only 3 have failed, compared to tens of thousands in the USA. Thus, these stocks can be seen as slow and steady growth stocks with a cyclical component. The trick for maximizing profits with these stocks is to buy when their stock prices are down and when their intrinsic stock value is still strong.

Dollar Cost Averaging Canadian Bank Stock Purchases

If you are not interested in constantly checking stock prices on even a few Canadian bank stocks, consider using dollar cost averaging for these investments. Investopedia defines dollar cost averaging as follows:

Dollar-Cost Averaging is a strategy that allows an investor to buy the same dollar amount of an investment on regular intervals. The purchases occur regardless of the asset’s price.

Because you will purchase fewer shares of these stocks when the price is high and more shares when the price is low, dollar cost averaging gives some of the same benefit as timing your Canadian bank stock purchases based on price, dividend yield, and P/E ratio.

Intrinsic Stock Value Calculation of Canadian Bank Stocks

Our belief is that every time before you buy a stock you should calculate its intrinsic stock value. That holds true for the three large Canadian banks we reference in this article. However, these are really stable investments that really do let you sleep soundly at night. As such, a yearly review of your portfolio of these investments is a good idea. Every five years is probably too long to wait. And, if you keep evaluating Toronto Dominion, Royal Bank of Canada, and Scotia Bank every month, you are wasting your time.

Investing in Canadian Banks with Dividend Reinvestment Plans

All three of the Canadian banks we looked at have dividend reinvestment plans. Using these plans during your working years is a great way to simulate the dollar cost averaging approach. Taking the dividend checks during retirement is a great way to reward yourself for investing in these safe, solid, and secure Canadian banks over the years.

Source: Macro Trends

This graph of 70 years of oil prices shows the fall from $111 oil in June of 2014 to oil selling for less than $40 by the end of the year. As income from oil and other commodity exports fell, Brazil’s economy went into decline from which it is just now starting to recover. The reason to consider investment in Brazil today has to with the new conservative government. It will be friendlier to and more closely allied with the USA, and more open for foreign investment.

US Relations with Brazil

Senator Marco Rubio wrote a piece published on the CNN website. Rubio says the US should go big on Brazil.

On New Year’s Day, President Jair Bolsonaro was inaugurated in Brazil, ushering in a new era in Brazilian politics that marks a dramatic departure from the leftist, anti-American governments of Luiz Inácio Lula da Silva and Dilma Rousseff. The new Bolsonaro government has already indicated it seeks an even closer security and economic relationship with the United States.

The senator notes that closer cooperation in areas from space exploration to protection of intellectual property rights are already in the works. Foreign direct investment is likely to increase in Brazil as investors see a government friendlier to foreign investment.

Direct Foreign Investment in Brazil

The World Bank tracks direct foreign investment year by year and country by country. Brazil took a hit after commodities fell in 2014 and the situation there was compounded by social and political turmoil.

Source: Deloitte

So, why would you want to invest offshore in Brazil based on this data? We have often commented that a good investment strategy is to follow the smart money. Folks with billions of dollars to invest have the resources to spot and take advantage of emerging investment opportunities. Financial services and the food and beverage industry are favorites of many investors.  As the graph shows, direct foreign investment bottomed out in 2018 and is expected to rise in the coming years.

How Could You Invest in Brazil?

We assume that you do not have a few billion dollars laying around for investment purposes and that you probably do not speak Portuguese or have an English speaking stock broker ready to pick up the phone in São Paulo and place your orders on the Bovespa stock exchange. But, in order to invest in companies in Brazil, you can buy American Depositary Receipts in the USA. These instruments trade in the USA and level 3 ADRs are subject to the same reporting requirement as US companies.

Investopedia discusses American Depositary Receipts.

American Depositary Receipts (ADRs) are stocks that trade in the U.S. but represent a specified number of shares in a foreign corporation. Like regular stocks, ADRs are bought and sold on U.S. markets. They also trade in U.S. dollars and clear through U.S. settlement systems allowing ADR investors to avoid transacting in a foreign currency. 

The advantages of ADRs are twofold. For individuals, ADRs are an easy and cost-effective way to buy shares in a foreign company. They save money by reducing administrative costs and avoiding foreign taxes on each transaction. Foreign entities like ADRs because they allow non-U.S. companies to gain more U.S. exposure, allowing them to tap into the wealthy U.S. equities markets.

There are companies in Brazil that list as ADRs on US exchanges. You can find a complete list of Brazilian ADRs at TopForeignStocks.com. Twenty-eight of these are listed on the New York Stock Exchange and are subject to NYSE financial disclosure requirements. There are also 45 that trade over the counter and provide less financial information.

The stocks in the NYSE list include the aerospace and defense company, Embraer, several large banks, a number of electric companies in a country where hydroelectric power is dominant, and Petroleo Brasileiro-Petrobras, the Brazilian oil and gas giant.

The trick will be to determine which of these will be the most likely to prosper as Brazil’s economy improves. Using the financial information provided for level 3 ADRs, investors will be able to do their own fundamental analysis of these stocks.

Investment in Brazil and Monetary Exchange Rates

If you do not invest directly in Brazil you will not need to convert US dollars to the Brazilian real (currently = 27 cents). However, the valuation of ADRs will be affected by the exchange rate. As a point of reference, a real was worth 44 cents before oil took a nosedive in 2014 and has been as low as 24 cents. As such the currency seems to have bottomed out and will likely appreciate in value versus the dollar as US interest rates level off and the Brazilian economy surges.

Brazil Selling Off Assets of State Owned Companies

An interesting bit of news from NASDAQ is that in order to reduce their national debt, Brazil is looking at selling assets of several of its state-owned companies. These include subsidiaries of the state oil company, banks, and insurance companies. Those interested in investing in Brazil during its economic recovery may want to watch this story as they search for buying opportunities.

Why Would You Want to Invest Offshore in Brazil PPT

Underpinning the bank’s preference for stocks in emerging markets is an expected stabilization in growth in those economies in 2019, while expansion in the U.S. is expected to slow.

The projected turnaround for emerging markets is one reason why the investment bank prefers stocks in those economies over that of the U.S. next year. Morgan Stanley said it upgraded emerging market stocks from “underweight” to “overweight” for 2019, while U.S. equities were downgraded to “underweight.”

So, if you too think that the US bull market has largely run its course and that the emerging market bear market has likewise stopped going down, why aren’t you investing offshore?

How to Find Value Investments Offshore: American Depositary Receipts

Unless you have specific knowledge and experience in foreign markets and with foreign investments, you may not know where to start. And, for that matter, you may not have the time to evaluate specific investments in specific countries. You can follow the advice of folks like Morgan Stanley, but what stocks to you look for in Brazil, Thailand, Indonesia, India, Peru, and Poland?

Once you have decided that a certain country is socially, politically, and economically stable, how do you pick stocks or other investments? One useful approach is to look at American Depositary Receipts or ADRs from any of these nations. Investopedia defines ADR.

An American depositary receipt (ADR) is a negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock traded on a U.S. exchange.

ADR holders do not have to transact in foreign currencies, because ADRs trade in U.S. dollars and clear through U.S. settlement systems. The U.S. banks require that the foreign companies provide them with detailed financial information, making it easier for investors to assess the company’s financial health compared to a foreign company that only transacts on international exchanges.

Because ADRs come with financial reports similar to those for US stocks, it is possible to make an intelligent decision regarding the financial strength of the company. As such this is logical way to find value investments offshore.

How to Find Value Investments Offshore: International Stock ETFs

Exchange traded funds or ETFs that include foreign stocks are also a viable route to take if you do not have a specific stock or country in mind. And when you do not have the time or expertise to find and evaluate specific investment opportunities you can look at ETFs that fit your needs. US News offers International Stock ETF rankings.

U.S. News has identified exchange-traded funds best suited for long-term investors seeking low-cost, diversified portfolios. Our rankings compare the cost and structure of hundreds of ETFs using our comprehensive methodology.

They group the international ETFs as follows:

• China Region
• Diversified Emerging Markets
• Diversified Pacific/Asia
• Europe Stock
• Foreign Large Blend
• Foreign Large Growth
• Foreign Large Value
• Foreign Small/Mid Blend
• Foreign Small/Mid Value
• Global Real Estate
• India Equity
• Japan Stock
• Latin America Stock
• Miscellaneous Region
• Pacific/Asia ex-Japan Stock
• World Large Stock
• World Small/Mid Stock

Each of the groupings has two or three options. You can look at their methodology to see how they make their picks.

Since all ETFs are intended to track an underlying index (for a variety of equities, or the price of a commodity, for example), we aim to identify large, liquid funds that perform reliably and could function well as part of an investor’s long-term asset allocation plan. We also compare funds’ costs, both those contained in commonly published expense ratios and implied by trading spreads, as well as a fund’s level of diversification and success in tracking its index.

In this case you are not so interested in evaluating specific stocks as you are in knowing how well the fund is run, how well it tracks its basket of equities, and how well they control costs so that profits are passed on to you and not sucked up by the fund’s management. This is a reasonable approach to finding value investments offshore.

How to Find Value Investments Offshore: Country Risk and other Issues

Although one can find spectacular profits in foreign investments, one can also invest offshore and lose everything when the government confiscates private assets, descends into civil strife, or otherwise damages your investment. How to evaluate a country for investment starts as simply as looking it up on Google Maps!

The World Bank is an excellent source of information for investing offshore. Whether you are thinking about  foreign direct investment or buying ADRs, the World Bank has lots of great information to help you evaluate a country for investments. The World Bank business project lookes at the ease of doing business index. This is a ranking from one to 189 of all nations for how easy or how hard it is to do business there listed by several factors.

If you go to the World Bank links make sure to navigate to the most recent reports. Another useful source of general information about any given country is the CIA Factbook. This source will not give you specific information for specific investments but it will give you a good sense of the country, its economy, and the safety or risk of investing there.

How to Find Value Investments Offshore: Short or Long Term?

A few years ago everyone wanted to invest in Brazil. The markets collapsed for commodities and Brazil’s economy went with it. Both in the USA and offshore there are investments that look great and then they don’t. We wrote some time back about the resource curse of boom and bust cycles. If you believe that you can time the markets, some of these investments can be very profitable. But, if you simply want offshore investments that will grow over time and allow you to sleep at night, look for stocks and ETFs with long and stable track records.

How to Find Value Investments Offshore PPT

If you don’t currently have holdings in these stocks or related funds, it might be time to add some to your portfolio. Small caps can diversify portfolios and bring higher growth potential albeit with higher risks.

Because small cap stocks are often new companies with growth potential they may be investment bargains or they may be death traps because of their narrow focus. As a group small cap stocks often tend to outperform large caps. The trick is to have enough of these in your portfolio to balance the risk of a couple of losers. Today that is easy with an ETF that tracks the Russell 2000. Investopedia explains.

The Russell 2000 index is an index measuring the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

In your search for bargain investments these days one place to look is at small cap stocks. Another option is to look offshore. While the US market seems to be topping out there may be room to grow in Europe and elsewhere. Investment News looks at how much of your portfolio you should allocate to foreign investing.

Most experts agree that adding international stocks increases your opportunities: U.S. stocks account for just about 54% of the world’s stocks, measured by market capitalization. Europe and Asia account for 22% and 20%, respectively.

Sam Stovall, chief investment strategist of U.S. equities at CFRA Research, says that their baseline allocation for international stocks is 25%, which he says has produced the best risk-adjusted return since 1969, when the MSCI indexes were first created. In portfolio composed of 60% stocks and 40% bonds, that translates to 45% U.S. stocks and 15% international.

The point of going international is that when the US market cools there is often a rally in Europe or Asia. Allocating part of your portfolio to these areas insures that you will not miss out on offshore opportunities. The best approach is to pick a fund that invests in a given offshore sector or pick ADRs of foreign stocks so that you are actually trading foreign stocks in a US market.

Knowing Something the Market Does Not Know

There are always companies that have just adjusted their business plan, invented a new product, expanded their market or have done something else that will bring in profits and drive their stock price up. Small companies in this position are often overlooked by analysts interested in multibillion dollar companies. The clues to these companies are often right in front of you. An example was given by Peter Lynch the Magellan fund manager who years ago took his wife and pre-teen girls to the mall and watched as their girls and hundreds of others descended on a new clothing outlet, Gap. The stock eventually made a big splash but the evidence was right there for anyone to see as young customers bought out their stores week after week.

Are There Any Investment Bargains These Days DOC

Are There Any Investment Bargains These Days PDF

Are There Any Investment Bargains These Days PPT

Chinese President Xi Jinping is in the United States this week for his first face-to-face meeting with President Trump.

One thing that could come up during those meetings is foreign investment in Africa. The continent’s population is expected to double to 2.4 billion by 2050. Both China and the U.S. are investing heavily in emerging markets across the continent.

Countries getting the most attention are Nigeria which is expected to pass the USA in population by 2050. Ethiopia and Kenya in East Africa are also growing and potential investment destinations as they have more diversified economies than many other African nations. South Africa was one of the BRICS nations and expected to rise to the first level of nations by midcentury but the Great Recession and bust in commodities has hurt them.

South African Junk Bonds

Economic problems have resulted in a South Africa junk rating for bonds and other investments according to Bloomberg.

South Africa’s rand and dollar bonds fell after Fitch Ratings Ltd. became the second company to cut the country’s credit assessment to junk, triggering sales by some investors tracking investment-grade debt indexes. JPMorgan Chase & Co. said it would remove South Africa from gauges tracked by $59 billion of funds.

President Jacob Zuma plunged South Africa into a political crisis when he fired Finance Minister Pravin Gordhan in a cabinet purge just after midnight on March 31, prompting a drop in the rand and triggering a downgrade to junk from S&P Global Ratings. The move by Fitch means the country’s foreign-currency debt will now be considered sub-investment grade, and brought the local-currency assessment to the cusp of junk.

If foreigners are going to invest in a country they need to trust the system and the people running it. When the local president, premier or prime minister starts acting like a dictator it scares investors. Be careful who is running the country and make sure that the government is not only investor friendly but also that Western trained and respected individuals are in positions of authority.

Cheap Currency, Good Opportunities

Egypt is attracting more investment as its currency has weakened according to the Financial Times.

It was the nettle that successive Egyptian governments had consistently shied away from grasping but could no longer avoid: the full float of the currency. Finally adopted in November 2016, the Egyptian pound halved in value against the dollar overnight, catapulting the country into a new era of risk and potential.

The flotation of the pound – long overdue, according to analysts and businessmen – was the most radical of politically-sensitive measures implemented by the Egyptian government to clinch a deal with the International Monetary Fund for a $12bn loan.

The pros here include a cheap currency and cheap labor costs. The cons include the factors such as government stability that made the Egyptian currency weak in the first place.

Pros and Cons of Foreign Investment in Africa DOC

Pros and Cons of Foreign Investment in Africa PDF

Pros and Cons of Foreign Investment in Africa PPT

The Cost of Investing Offshore

Likely the biggest barriers to investing in international markets are the transaction costs. Although we live in a relatively globalized and connected world, transactions costs can still vary greatly depending on which foreign market you are investing in. Brokerage commissions are almost always higher in international markets compared to domestic rates. In addition, on top of the higher brokerage commissions, there are frequently additional charges that are piled on top that are specific to the local market, which can include stamp duties, levies, taxes, clearing fees and exchange fees.

Currency Fluctuations and Worse

When investing directly in a foreign market (and not through ADRs), you have to exchange your domestic currency (USD for U.S. investors) into a foreign currency at the current exchange rate in order to purchase the foreign stock. If you then hold the foreign stock for a year and sell it, you will have to convert the foreign currency back into USD at the prevailing exchange rate one year later. It is the uncertainty of what the future exchange rate will be that scares many investors. Also, since a significant part of your foreign stock return will be affected by the currency return, investors investing internationally should eliminate this risk.

Buying stocks as ADR’s is a simple solution for someone who wants to invest only in foreign stocks. Otherwise you need to know how to use the Forex market to hedge your currency risk. Because currency futures, options and forwards are relatively complex for beginners an alternative might be to use a currency ETF. Of course the worst risk is if a country goes bankrupt, its currency becomes worthless and assets get frozen.

Liquidity Issues

Another risk inherent in foreign markets, especially in emerging markets, is liquidity risk. Liquidity risk is the risk of not being able to sell your stock quickly enough once a sell order is entered. There are some common ways to evaluate the liquidity of an asset before purchase. One method is to simply observe the bid-ask spread of the asset over time. Illiquid assets will have wider bid-ask spread relative to other assets. Narrower spreads and high volume typically point to higher liquidity.

Sovereignty Risk

This one is our own take on foreign investment risk. If you owned assets in Libya before Gadhafi took over in the 1970’s you lost everything. The same thing happened in Cuba with Castro and to a degree in Venezuela first with Chavez and now Maduro. Unique risks associated with foreign investments can include having a strongman take over and nationalize all private assets. Make sure you have a clear sense of how stable the country is before investing there.

What Are the Unique Risks Associated with Foreign Investments? DOC

What Are the Unique Risks Associated with Foreign Investments? PDF

What Are the Unique Risks Associated with Foreign Investments? PPT

Amid the political uncertainty of Brexit, mounting social turmoil over immigration and barely there economic growth, Europe has improbably emerged as the hot stocks trade this year.

The postelection rally in U.S. equities is looking tired as gridlock has sapped momentum in Washington. Investors have been looking for a better place to grow cash, and the European market is quickly becoming the favorite target.

“We believe that the underlying performance of European equities is potentially misunderstood by market participants,” Henry McVey, head of global macro and asset allocation for private equity powerhouse KKR, said in a lengthy report for clients. “We also believe that European equities, financials in particular, are poised to perform well in 2017.”

The market has begun to take notice.

Last week we asked why aren’t you investing offshore. And we showed where the smart money is going.

The United Nations World Investment Report for 2016 shows which countries investment money is flowing into and in what amounts. In 2015 money flowing into Asia and Europe each exceeded that flowing into North America.

All of the hype about the Republican White House and Congress stimulating the economy is wearing thin. The Affordable Care Act repeal debacle is being read as a sign of things to come. The Trump years may end up like the Carter years when the same party holding all of the keys to power was unable to work together on a coherent agenda. Tax breaks, offshore corporate cash repatriation and infrastructure spending all seem unlikely at least in the near term. In the meantime why is Europe looking so attractive?

Buy Low, Sell High

A lot of money is moving out of US stocks and into European stocks simply because the US market is priced too high and European stocks are comparatively cheap. The Brexit hurt European markets but investors have adjusted and the EU does not appear to be going away. And Europe has not had to deal with the hype of a return to Reaganomics that has been inflicted on US markets.

The State of Europe

China is inaccurately referred to as the second largest world economy. The first and second largest world economies are the USA and the European Union. The USA’s gross domestic product is $18 Trillion a year while the EU has a GDP of $17 Trillion. China’s is around $11 Trillion. The Euro is the second most traded international currency after the greenback. And like the USA, Europe’s stock markets are open and transparent making it safer to invest than in the emerging markets of Asia. The shock of Britain leaving the EU is wearing off and the pain that Britain will suffer for its decision may well deter other nations from leaving the fold. As such Europe is a viable alternative to investing the USA and currently a better idea.

Is the European Economy Ready to Boom? DOC

Is the European Economy Ready to Boom? PDF

Is the European Economy Ready to Boom? PPT

Chinese stocks dropped the most in three weeks, led by industrial companies and small-cap shares, amid concern that a weaker yuan will limit prospects for further stimulus and state-backed funds will sell shares.

The Shanghai Composite Index declined 0.8 percent at the close. Beijing Originwater Technology Co. posted its biggest loss since February. Hong Kong’s Hang Seng Index rose 0.3 percent, reversing a loss of as much as 0.6 percent. The ChiNext gauge of small-cap companies slid the most since July 27.

“To stabilize the yuan, the People’s Bank of China may have to reduce liquidity in the domestic market,” said Hao Hong, chief strategist at Bocom International Holdings Co. in Hong Kong. “The market will be consolidating in the short term.”

The Chinese economic miracle seems to have come to an end. There a several reasons for this. First of all the effects of the Great Recession are still being felt across the globe so Chinese exporters are dealing with fewer orders. The country is importing fewer raw materials which hurts emerging market nations dependent on commodity sales which in turn further reduces buyers of Chinese products. And China is following the same path as Taiwan, Japan and South Korea in that its workers are getting older and demanding higher pay. China has become less competitive at a bad time. And there is the matter of Chinese debt.

Dangerous Chinese Debt Burden

When you ask yourself should I buy Chinese stocks consider the debt burden that China has taken on. While its economy was growing at ten percent a year or better it was a functional business model to take on debt to fuel growth and subsequent profits. But the debt taken on since the Great Recession has not resulted in the same level of growth as before. Barron’s looks at China’s debt problem.

The Chinese economic profile shows stark contrasts. Its legacy of rapid and sustained growth for three decades is unsurpassed. At the same time, however, China has accumulated debt at an extraordinary scale for a developing economy. This could weigh heavily on Chinese and global economic performance in the years ahead.

The day of reckoning is not here yet. But history suggests that a debt build up has consequences. In general, China’s economy and financial system are vulnerable and susceptible to shocks when there is a significant accumulation of debt.

In the 1990s, Thailand and Mexico buckled under the burden of heavy debt. These are relatively small economies, and they had external debt issues. China is a large economy and faces domestic debt problems. The Japanese experience after the 1980s debt boom and the recent U.S. financial crisis following a credit surge are closer to the Chinese situation.

The smart betting says that China will follow the Japanese example with much slower growth and deflation. Should you buy Chinese stocks? Strong companies a large offshore market might be good bets as the Yuan weakens and makes Chinese products more attractive but beware of high debt loads in the land of managed capitalism.

Should I Buy Chinese Stocks? PPT