Over the last couple of weeks I have posted many charts in regards to the possibility of the Chinese slowdown. I could have posted five times more charts, but the point of it all is... if China does go into a economic recession, how could one profit from it?
There are many different ways to accomplish this, if one becomes right - remember nothing is for certain and neither is the Chinese property collapse. Famous short seller Jim Chanos has been famously shorting property companies, equipment manufacturers and commodity producers. On the other hand Hugh Hendry, a famous super bear hedge fund managers, is betting on Chinese collapse through Japanese company credit default swaps. One could also look at shorting industrial metals like Copper (maybe a tad too late there haha). I do not like shorting commodities, because they are in a cyclical bear market, but a secular bull market. Therefore I rather focus on other industries.
Basically, one of the ways I have been planning to play the Chinese credit bubble is to short luxury retailers who have been benefiting from the boom in not just China, but the overall South East Asia. Companies like LVMH, Christian Dior, Tiffany & Co and Hermes are prime examples. I'll spare you all the walk through on why I think there is a huge access in this industry. If you are a tad behind, I recommend you travel a bit more and see what has been happening on this side of the world (and also drop me an email if you are in Hong Kong next week). Travelling the world is actually one of the best ways to improve becoming an investor - daily swing traders need not apply as your technical indicators are sufficient enough.
It seems to be that the luxury sector is now showing signs of topping out after gaining somewhat in the area of 2.5 times since March 2009 - quite a bull market might I add. Its not that I am a fan of any technical patterns, like the one shown in the chart above, but that some of these companies like Hermes are now trading at 50 times reported earnings, having gone parabolic in the last three years.
On top of that, when I look at relative strength of Luxury Sector vs MSCI World Index, we can see that since March 2009, this sector has been a leader of the cyclical bull market. However, in the last few months we have signals that this strength is breaking down. Something is not right in Asia and especially China. Strong companies like LVMH, Christian Dior and Tiffany & Co are also breaking down and after failing to make new highs in September. Furthermore, Mulberry and Burberry also fit this type of price action.
The excesses of the luxury boom aren't just witness in the high end apparel labels. The wealthy Chinese have been enjoying themselves in Macau, the Las Vegas of the East. But... if the market is a discount mechanism we all claim it to be, than the current signals might be showing signs of that boom ending soon enough. In the chart above, we can see Wynn Resorts also signalling a potential topping pattern. Sands China looks quite similar too.
Summary
While majority are focused on Greece and EU, I have been watching China for weeks now. One might argue that Chinese credit bubble has been obvious for years, but I would say that its all about timing... and that timing might be now. Some of the strongest pillars of the cyclical bull market from March 2009 until recently, are now starting to break down - and they have very strong links to China as well as Asia.
From luxury labels to casino companies, one might view these signals as a sign that there is definitely something wrong with Eastern booming economy. Despite of its strong fundamentals, favourable demographics and great future potential, even Asia including China might now be ready to roll over and join its cousins in the West for a medium term correction and a potential slowdown in 2012.
Caution is heavily advised despite the current rally which started last week due to bearish sentiment. The dare devils (aka trading accounts) should take a peak at the opportunity to open some shorts on some of these companies as they participate in the current short covering rally.
As a Hong Kong people, I really feel that Chinese are crazy about the luxury goods.They seem to have unlimited purchasing power.
ReplyDeleteI think some of retail stocks with high valuation listed in Hong Kong is a alternative.
I completely agree Bo. I have been to Hong Kong many many times before and used to work in the luxury retail space myself. I know first hand what the boom has been all about, not just in HK but in the whole of Asia.
ReplyDeleteThat is why I am extremely bullish on not just China, but the overall Asia in the very long term. This will be the decade of Asia and even the century of Asia.
But in the short term we could get some nasty downside surprises next year!