“If the Chinese stocks are estimated to increase in value,” reader Garrett S. wrote in and asked, “how does this reconcile with the [imminently] approaching bear market in the U.S.?”
Said simply: Can Chinese stocks go up if U.S. stocks are crashing?
Today, I want to look at one simple example of what happens to Chinese stocks when U.S. stocks are in a bear market…
As regular readers know, I’m bullish on Chinese “A-shares” – stocks that trade locally on the Chinese mainland. Hundreds of billions of dollars will start to flow into these stocks over the next five years… which means our opportunity is huge, even if U.S. stocks eventually enter a bear market.
Let’s look at the last time U.S. stocks had a “Melt Down”… and what happened to Chinese A-shares during that crash…
U.S. stocks peaked in March 2000. After the peak, the Nasdaq Composite Index lost 70% of its value by September 2001.
This chart shows what happened to Chinese A-shares during the final inning of the last great “Melt Up”… and the subsequent bust. Take a look:
As you can see, during the first three months of 2000, Chinese A-shares soared, right in line with the Nasdaq.
Then, the Melt Down in U.S. stocks arrived in March 2000. The Nasdaq crashed.
But look at what happened to Chinese stocks… They kept going up!
During the biggest U.S. stock crash of our lifetimes, Chinese stocks soared 64% – to all-time highs.
When Chinese stocks move, they REALLY MOVE – regardless of what’s going on in the U.S.
Three separate times in the last dozen years, the entire index of Chinese A-shares has delivered triple-digit returns within 18 months.
Don’t get me wrong. Chinese stocks DON’T ALWAYS go up when U.S. stocks go down.
The important thing to know is this: Out of all the major stock markets, China is the least correlated to the U.S.
When U.S. stocks fall, European stocks will likely fall. Japanese stocks will likely fall, too – but Japanese stocks are less likely to fall than European stocks. They are slightly less correlated to U.S. stocks, based on history.
Chinese stocks are yet another step removed beyond Japan…
Simply put, China’s stock market is not as affected by what happens in the U.S. stock market, compared with most other countries.
This correlation has been changing…
As China becomes more open and more integrated with the global economy, China’s stock market is becoming more correlated to the rest of the world than it used to be. But it is still the least correlated major market to the U.S. stock market.
To sum it up… could Chinese stocks fall if (and when) the U.S. stock market falls? Absolutely! But they don’t have to. And they will probably fall less than other assets.
So are Chinese A-shares a good investment for the next five years? Absolutely!
Bill Bonner went to law school with Fed Chair Jerome Powell... Co-authored 3 New York Times Best-sellers... And is one of America's most successful entrepreneurs. Bonner's made 3 big macro-economic predictions in his 40-year career, all of which came true. Now he's issuing his 4th and Final Warning. 2023 could be a difficult year for you and your money. See Bonner's warning and 4 recommended steps here...
Source: Daily Wealth