I will be coming clean in this post. Yes, I did watch The Apprentice with Donald Trump. At the beginning of the season I did watch the intro episode revealed what each contestant did for a living. I pointed out to my wife that it seemed that every other contestant was in real estate of some form. At the same time this show was airing I was selling a condo that had 30 bids over the asking price the day after it was self listed. You remember these days and what has followed.
Ripped from the headlines
Today’s Financial Times had a very interesting piece on the suspected bubble building in China titled Rule of the iron rooster by Jamil Anderlini. Here are a few of the troubling points Mr. Anderlini addresses:
- A quote from a Chinese corporate executive that used to live in the U.S. stating that he is worried “…what is happening now is similar to what happened in the U.S. in 2001 – the government flooding the economy with cash that just ends up papering over the problems.”
- “The property market is so hot right now and prices are going up so much that it is really a seller’s market.” This is a quote from a Chinese driver that making a meager living and speculating on real estate.
- A senior executive at a Chinese investment bank was quoted as saying “Those in the private sector that have been able to get loans from the state banks are mostly keeping it for a rainy day or speculating on stock and property markets; very little is going into the real economy.”
Why are the headlines troublesome
The headlines from China today sound very familiar to recent U.S. history. The problem is in today’s world many investors (both professional and non-professional) look to what is happening in China. Remember China holds loads of U.S. government debt and dollars, is a huge consumer of commodities and just recently surpassed Germany as the world’s largest exporter. An asset and property bubble in China could be very bad. Long-term China will probably be a fine investment but, after the recent blow up in the financial markets you can not afford to ignore the potential for another drop in global asset and commodity prices.
Action
A drop in the Chinese markets will more than likely affect world asset prices. What can you do now? The Chinese markets have already been experiencing a pull back that has not exactly affected other emerging markets. At this point you should have identified loss limits on your China, emerging markets holdings, and for that matter all other equity holdings.
One problem many ETF investors have is wanting emerging markets exposure but not the load of China holdings that come with emerging markets ETFs. If this is you consider excluding China by breaking out your emerging markets holdings into Latin America and Emerging Europe and India ETFs. Also you could consider the Wisdom Tree Emerging Markets Equity Income ETF (ticker DEM). This fund has very little allocated to China but does have considerable exposure to Taiwan. DEM has its own risks in that it has low trading volume in a volatile area and has 31% percent invested in Taiwan.