Investing in China: “Fad” vs. Secular Mega-Trend


Many savvy marketers are quick to point out that in their opinion, humans make primarily emotion-driven decisions and justify them using reason. In other words, that perhaps most of the decisions we consider logic-based are actually nothing more than emotional decisions, cleverly designed by our ever-adapting brains.

When it comes to the world of economics, especially the dimensions of economics related to market forces, the claim in question has its merits. Indeed, as any experienced investor can confirm, there’s a reason why expressions such as ”madness of the crowds” have become popular. Investors frequently end up making gross capital allocation mistakes due to extreme greed and when the unsustainable structure that kind of activity has created collapses, the same investors are quick to embrace the other extreme, fear.

And, indeed, many capital allocation mistakes pertain to assets or asset classes that are perceived as “hot” in one way or another. Anything from tech stocks in the Dot-Com Bubble days, real estate prior to the Great Recession, cryptocurrencies and… yes, you’ve guessed it, China. As such, the “Is investing in China a fad?” question has a clear answer: yes!

However, as ironic as it may seem, the “Are you embarking on a secular mega-trend by investing in China?” question has the same answer. To put it differently, contrary to what the slightly tongue-in-cheek title of this article may allude to, both statements are true: while many investors have directed their attention toward China due to it being a “hot” option, it doesn’t change the fact that developments in China are most definitely in secular mega-trend territory.

Things are not always as relative as investors make them out to be and two broad dimensions arise when it comes to “hot” assets:

  1. Assets that don’t really have all that much going from them other than market psychology working in their favor temporarily. Needless to say, an asset that lives by market psychology will die by just that and as interest fizzles out, so does the price and liquidity of the asset in question
  2. Assets that are indeed over-valued at various points in time as a result of the fact that investors got carried away due to what Alan Greenspan would consider irrational exuberance but which have remarkably strong fundamentals. For example, yes, tech stocks were grossly over-valued during the Dot-Com Bubble but those who bought carefully-chosen assets (rather than superficial picks) at even Dot-Com Bubble highs and held up until this point are doing ridiculously well. For example, Amazon was in $100 territory during the peak of the Dot-Com Bubble and collapsed all the way to a mere $7. Those who were savvy or lucky (perhaps both) enough to catch the bottom and held up until this point are 72 times “richer” in terms of that asset and even those unlucky enough to have bought at the $100 high now own an asset that is worth 18 times more

… needless to say, China is a textbook example of category #2.

Yes, at one point or another, some asset classes and/or individual assets will end up being over-valued but this doesn’t change the fact that we are dealing with a multi-decade trend which currently involves the destinies and productive capacity of roughly 1.4 billion individuals. To call this a “fad” and leave it at that would be shortsighted at best.

Are the hordes of investors who occasionally jump into any investment vehicle that contains the word “China” doing so because they’ve thoroughly researched the fundamentals? Because they diligently analyzed the pros as well as cons? Of course not! But, and therein lies the key to understanding the various nuances of this article, this doesn’t stop the fundamentals from existing and generating long-term effects.

If humans were robots, the price of assets (including China-related ones) would simply move higher continuously in a linear, predictable or if you will “boring” manner. But because we are not, this doesn’t happen and instead, we have the (in)famous business cycle. When everyone is excited about an asset, prices move up in an unsustainable manner and when fear sets in, prices move down just as abruptly. But in the long run, it’s fundamentals which bring about a secular mega-trend that becomes more than obvious once you zoom out and take a few steps back.

That being stated though, it would be a mistake to end this article without making it clear that not all assets of a particular asset class are worth investing in just because the fundamentals of the asset class in question are rock-solid. In fact, for every Amazon stock investing success story, we can easily find examples such as those who invested in during the Dot-Com Bubble, which went from a market capitalization of over $300 million to zero within a mere 258 days. Remaining in Dot-Com Bubble territory, it is worth noting that only one out of two Internet companies survived.

Therefore, being selective and patient is the name of the game when it comes to investing in Chinese assets. By being selective but not patient, you might be among the ones who bought Amazon shares at $100, sold at $7 and missed out on the entire run from $7 to today’s value. The same way, being patient but not selective is not enough either, as those who “patiently” held their shares can confirm. To make sure you are in the former category rather than the latter, working with consultants who meaningfully understand the asset class you are targeting is a must and when it come to all things China-related, is here to help.

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