Wealth

Finding Hidden Gems in a Tumultuous Market: 3 Sectors Ripe for Investment

An associate of mine garnered wealth through investments in stocks amidst what was widely deemed a tumultuous year, the previous year.

Owing to professional commitments, direct stock purchases elude him, yet he navigates through stock funds with ease. His fund portfolio maintains a simplicity, comprising solely of three ETF funds, focused on banking, coal, and real estate sectors.

Over the past year, the bank fund yielded a profit margin of 10%, while the coal fund saw a 16% increase, juxtaposed with a 22% loss in the real estate fund. Nonetheless, owing to the bank positions’ relatively higher proportion, his fund portfolio sustained a general profitability, hovering around 4%.

This outcome is not disconcerting, rather satisfactorily sufficient. Moreover, the basis for his investment strategy is refreshingly straightforward – thriftiness.

Primarily, ETFs stand as the most economical investment vehicles. Contrasted against funds overseen by illustrious star fund managers, the fees associated with such funds are virtually negligible. I am reminded of the grand spectacle three years ago, when billions were lavished on a stock fund, with exorbitant subscription fees demanded for participation. It now seems like a distant reverie.

Certainly, juxtaposed with those esteemed financial institutions that fell prey to Luobo Zhang’s schemes, pricey public funds may be likened to the Sanqiu Guizi Shili lotus in existence. The nadir of each economic cycle unfailingly exposes the venal nature of investment products endeavoring to cloak themselves in opulence and extravagance. Conversely, unassuming passive products emanate the luster of rationality – cheap goods indeed hold merit.

Among the realms of affordability lies the realm of commercial banking, a domain we have long favored. Despite the overall rise in prices of commercial banking companies by 10% in 2023, their valuations remain unimaginably low.

Particularly noteworthy among these exceptional companies is their stock prices, suppressed in the wake of recent upheavals, with the sole concern being the legal entanglements of their top executives – hardly a cause for alarm.

Rendering such judgment does not amount to “contempt of the king’s law”, but rather acknowledges the intricate dynamics of giant corporations valued at billions of yuan. The role ostensibly played by top leadership is substantial, yet in actuality, negligible—especially in traditional sectors such as banking, consumer goods, and manufacturing. In fact, the more inconspicuous a leader, the greater the company’s success.

An exemplar of this phenomenon is Kweichow Moutai, the pinnacle of China’s A-share market, which has seen four changes in chairmanship since 2018. Despite two chairmen facing legal repercussions, this has had no bearing on the company’s operations.

Diminished market valuations harbor a silver lining – opportunities akin to seashells left in the wake of receding tides.

The scenario for these exceedingly outstanding commercial banks bears semblance to this. Despite financial reports showcasing their superiority among all major banks, their price-to-earnings ratios fall below 5 times. This exceptionally low valuation, coupled with stellar operational performance, yields exceedingly high dividend yields, pre-tax, hovering around 6.5% based on prevailing stock prices.

As Buffett aptly remarked, stocks are bonds masquerading in disguise—beneath the veneer of commercial banks lies an inherently attractive façade.

Another avenue of opportunity arises from the realms of “too big to fail” and “distressed” sectors, such as steel.

Steel, an ancient and unglamorous industry, especially amid an era awaiting macroeconomic revival, witnesses valuations plummeting to near rock bottom. Indeed, the valuations of some steel companies are less than 0.4 times their book net assets—a prospect fundamental value investors find alluring, akin to spending 4 cents to procure 1 yuan worth of assets.

Moreover, steel companies situated in China’s antiquated heavy industry bastions carry the weight of indispensability. Should their operations dwindle significantly, the company’s operational woes might spill over into societal issues.

In essence, delving into these bargain opportunities beneath rock-bottom prices constitutes a form of speculation. There exist two categories of speculation—one inferior and thoughtless, the other, a more sophisticated manipulation of probabilities. Naturally, we endeavor towards the latter. Furthermore, such speculative endeavors thrive during periods of recuperating investment growth and project initiation rates.

The third category of bargains emerges from undervalued companies hovering at the fringes of the real estate sector.

Despite lingering issues within the real estate sector, common wisdom dictates the continued necessity of real estate companies. This belief stems from China’s ongoing urbanization process, which, unlike more mature economies, boasts a more efficient urban construction model owing to divergent land ownership systems. While our sprawling metropolises accommodate burgeoning populations, the necessity of lesser-tier cities remains subject to future trade-offs.

To draw a parallel, as Engels elucidated in “The Origin of the Family, Private Property and the State,” “What magic elixir did the Germans use to inject new vitality into dying Europe? It was just their barbaric state… Indeed “Only barbarians can rejuvenate a world struggling with a dying civilization.”

China’s economic resilience, diverging from Japan’s three-decade stagnation, is underpinned by the presence of hundreds of millions of “barbarians” who guarantee ongoing urbanization and economic prosperity.

Emulating my associate’s approach, investing in ETFs of real estate companies presents an attractive option. Notably, their market valuations have depreciated by an additional 30% following a sufficiently cheap valuation in 2023—welcomed news for those with liquid assets.

Of course, certain construction companies offer a safer bet than real estate, with comparably low valuations.

Moreover, the Hong Kong market warrants consideration.

Hong Kong’s market hosts some of the mainland’s most exceptional internet companies. Undoubtedly, market sentiment casts an overly pessimistic shadow on their future prospects. Although macroeconomic adjustments in recent years have dampened their performance, these companies persist as mainland China’s most profitable entities, ensuring consistent returns as long as our daily lives endure.

Statistically speaking, Hong Kong’s Hang Seng Index has witnessed four consecutive years of decline—an unprecedented streak since its 1967 inception. Notably, during its nascent years and from 2000 to 2002, the index witnessed remarkable gains following prolonged declines—though these observations are statistical in nature, devoid of logical rules.

Furthermore, the market’s subdued valuations have engendered certain “small indulgences.” Notably, dwindling IPOs have transformed new shares into a guaranteed profit avenue. This presents a remarkable opportunity, requiring minimal investment, with a high likelihood of garnering an additional month’s salary annually. Truly a splendid proposition!

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