China Dethroned From Number Two

"I never imagined I would see a day when NOBODY was invested in the world's second-largest economy and the world's second-largest stock market."

I've been saying that for at least two years now.

Well, as of last week, I can't say it anymore... at least for the time being.

You see, China is no longer the world's second-largest stock market.

Chinese stocks have struggled this year. And they dropped far enough last week that they fell below the value of Japanese stocks.

So is China in decline? Are Chinese stocks now a bad deal?

No, and no.

Let me share two charts to show you why...

To start with our first question: China is not "in decline." The market capitalization of China's stock market is up nearly 1,500% since 2003 – to $6.01 trillion.

Japan's market cap is only up about 100% in the same time frame – to $6.15 trillion.

This first chart shows the crazy difference in market-cap growth between the two countries since 2003. Take a look...


However, the chart also shows this year has been rough for China.

China passed Japan in terms of total market value in 2014. But with a falling stock market and a falling currency, China dipped below Japan last week. And its growth fell off as a result.

My expectation – and I hope yours too – is that this is temporary... that China's overall stock market value will once again beat Japan's during China's next great bull market.

As I've written many times, hundreds of billions of dollars are already starting to move into China's locally traded stocks (called "A-shares") as they join the world's major indexes. This will be a huge story over the next few years... And that's just one piece of why China is positioned for a major boom.

The second question is, "Are Chinese stocks a bad deal?"

Again, the answer is simple. No. Chinese stocks are cheaper than they've ever been relative to U.S. stocks...

U.S. stocks (as measured by the S&P 500 Index) trade at a price-to-book ratio of 3.38. Chinese stocks (as measured by the Shanghai Composite Index) trade at a price-to-book ratio of 1.45. Take a look:


Said another way, Chinese stocks trade at a 57% discount to U.S. stocks based on this traditional measure of value. Chinese stocks have never been this cheap relative to U.S. stocks.

So is China on the decline? No. Its market cap has increased 1,500% since 2003.

Are Chinese stocks a bad deal? No. They are cheaper than ever compared with U.S. stocks.

Sometime in the next five years, I believe Chinese stocks will deliver triple-digit returns within an 18-month period. I don't know if that period starts today, or a couple years from now. But you want to be on board when it kicks in.

Right now, Chinese stocks are in a downtrend. Downtrends in China can be bad – and the recent trade-war talk isn't helping. But we want to be ready for this to blow over, as I expect it will.

Don't let the recent China headlines bring you down. Be ready to invest heavily in China A-shares when the uptrend returns...

Good investing,


Further Reading

Recently, Steve revealed how his readers booked 82% gains in just 10 months on Chinese stocks back in 2015 – while avoiding the worst of a major bust. We can learn from this today... Read more here: How I Plan to Profit in China for Years to Come.

"The American perception of China versus the reality on the ground is as big a gap as I have ever seen in my investing life," Steve says. Learn more about how to use gaps like these to find major investing opportunities right here: My Biggest Investing Edge: 'Variant Perception.'

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Market Notes


Today, we're highlighting a company that sells the essentials...

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As you can see in the chart below, shares of GWW are taking off. The stock soared more than 100% over the past year, and it recently hit a new all-time high. This is just another example of how "selling the basics" can lead to huge gains...