Back in 2009, Warren Buffett started buying up shares in U.S. banks after they got crushed by the market.
His gamble paid off, and recent reports are that he has made more than $10 billion on that deal.
As I like to emulate greatness, I recommended a beaten-down Greek bank, the National Bank of Greece, to readers of my Crisis and Opportunity service in July.
It is up 80% since my recommendation.
As you remember, Greece was the most hated investment on the planet just a few months ago, and Greek banks in particular.
This is how contrarian investments work — and why they pay off big…
The very fact that investors hate a particular sector means that all the sellers are out, and no one is left but potential buyers. This is when we step in and buy the fear.
Later, when there is good news, others will become greedy and buy the stock from us at a premium.
The first question you have to ask when looking for an investment like this is: What is the most hated industry in the world?
Right now, you’d be hard-pressed to find a sector more hated than Chinese banks.
There has been a lot of ink spilled on the Chinese building houses that no one lives in and other misallocations of investments. This idea, coupled with the new leadership and a slowdown in the export market, has put a lid on Chinese investments.
The Dragon Awakes
But this could all be changing.
China, the world’s second largest economy, grew at a 7.8% annual pace in the third quarter.
The reactions from most analysts I’ve read have been that these numbers are either bogus, or that the growth isn’t going to continue.
In my mind, this is positive for investments. It means they are still waiting to buy.
The truth is that Wall Street isn’t looking at the big picture. China wants to make its currency, the RMB, equal to that of the dollar, yen, or euro. This will give it weight on the world trading stage and reduce its reliance on foreign currencies.
In light of the staggering debt burden carried by its three competitors, it makes perfect sense. China is a creditor nation that holds foreign currency in reserves.
The United States, Europe, and Japan all owe more than 100% of GDP in debt.
The most recent quote to come out of the Washington government shutdown debacle was, “We have to increase our debt to pay our bills.”
This boggles the mind.
China’s Defense
To prevent its $3.7 trillion in foreign currency from being inflated away, China is boosting the strength of its own currency by letting it float and by buying lots of gold.
The Chinese central bank imported 131 gross tons of gold in the month of August. This is a 146% increase compared to a year prior — the second highest gold importing month in Chinese history.
China has imported 2,116 tons of gold in the past two years. This is in addition to the gold the Middle Kingdom has produced domestically.
The People’s Bank of China is aggressively seeking to make the RMB the only large gold-backed reserve currency in the world. It’s working. The RMB rose a record amount against the dollar last Monday.
Furthermore, the U.K. recently allowed investors to buy Chinese shares with offshore RMB. This will boost the international scope of the currency. They are talking about expanding the use of the RMB in the United States as well.
Obviously, the way to play a rising RMB and a falling dollar is to buy assets in RMB.
Undervalued Chinese Banks
Right now, Chinese banks are undervalued.
The Chinese Financial ETF (CHIX) has a P/E of 7 and a dividend yield of 2.90. The S&P 500 has a P/E around 15.
Bank of America (BAC), the bank Buffett made money on, now has a P/E of 32.
As you can tell by the chart, the downtrend has been broken and volume has returned.
The CHIX is a solid value speculation on an expanding Chinese economy that is increasingly backed with gold.
We’ve been aggressively adding Chinese stocks to the Crisis and Opportunity portfolio…
Our picks are up 16%, 3.54%, and 22.34% — with no losers. But it’s still early. These companies are undervalued, with lots of room to run.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
