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Why I decided to buy into China and India

MANY interesting changes and new observations have been made recently at a dizzy pace. I have had to work hard to keep up. The fundamentals of investment markets have gone through changes in value as well as perception.

The inflated American 'share prices versus earnings' (price to earnings ratio) appears to have just about normalised according to ONE report. There are three graphs that I have seen showing the long-term median and average p/e ratio is now more reasonable, but it is still a little high.

Inflated share prices are still being supported by a people's need for an escape from unsustainably low interest rates - but interest rates are expected to rise. The Chinese market is looking a lot firmer and I have moved some of my own money out of my long-term holding of cash (long-term being a waiting game because of inflated asset values just about everywhere) back into China and India.

Of three p/e graphs I have seen, I like this one the best because it goes from around 1870 to 2015, whereas the others are based upon estimated future earnings. The other two look much cheaper at p/e of 16:


If you want to avoid a drubbing, watch the overall market p/e history and be aware of interest rates. The p/e ratio always returns to the mean /average value - take your pick, as interest rates normalise.

How does this relate to South Africa?

When the American S&P stock market crashes, all world markets tend to do the same. But this is not forever. It is how things are today. If anyone knows of a source for p/e ratio graphs for most countries, nicely displayed like this, and based upon past data, not forward data, please let me know. Write a comment (see below).

Then we get a speech by Andy Haldane about taking interest rates negative. The problem that the world faces is the use of interest rates as a policy instrument. Rather than admit defeat, central banks appear to think that more of the same is the answer.

They have backed off QE (printing money) because by using that to buy up fixed rate bonds they are starving financial institutions of investments that are essential to their financial stability. They think that printing money and giving it to everyone is crazy, without even understanding that what they are doing is much more crazy.

And they are pretending that when people borrow huge amounts of money, money that they are barely able to afford, the answer is to make it even more affordable by using negative interest rates. What about giving people time to pay it back?

Here is an interesting change in thinking coming from the Cobden Centre. The centre is usually a bastion of support for the gold standard, which I have repeatedly attacked on their website. There seems to be a shift now to what I wrote. Here, from their website:

"The only reason any particular form of money has exchange value is because people are prepared to exchange goods (and skills - my note) for it, which is why relative preferences between money and goods give money its value..."

As I always explain, the value of gold and of anything else is what people are prepared to exchange it for. If a central bank fixes the price of gold, then they will end up owning all of it or none of it. The same if they fix the price of beans...

Another essay was written by the Executive of the Bankers' Association attacking the US Federal Reserve for not raising interest rates. Meantime, I submitted an essay "Monetary Policy has always been wrong" to an academic website:

"Monetary Policy has seldom seemed to be so confused and confusing. This is not only because of the advent of QE (quantitative easing) as a policy instrument and the lack of precision of the interest rate instrument. It is not only the question of which instrument  to use to create new money, or how much money should be in the form of credit that needs to be continuously replaced as it gets repaid - a hopeless management task in itself..."

I have run out of space but I could easily write another two thousand words on all this right now. Perhaps next week I will publish that paper in full on this website.

Meantime, on the investment front, I have decided to buy into China and India because these have long-term growth potential and have lost most of their excess p/e recently:

And HSBC says that the excess leveraging of share prices has now been normalised: the Chinese were borrowing to invest, in some cases borrowing almost ten times the amount that they invested. That is why I sold out. In those circumstances, you get little time to cut and run when the inevitable collapse occurs.

* Edward Ingram is a leading thinker on the world stage of  macro-economic design and has written a series of essays for Fin24.

Do you have a comment? Write to Edward Ingram and you could be published.


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