 Good day, fellow investors. Chinese stocks have been crashing lately, but let's put things into perspective. In this video we will compare the current Chinese stock market crash with the previous Chinese stock market crash that wasn't that long ago. We're going to discuss how I believe that trade war fears are a little bit exaggerated and it's just a big media blow-up because the media has to talk about something. We're going to discuss Chinese economic growth, Chinese economic growth forecast, Chinese economic growth, facts and then compare it to the market sentiment. How the market goes about investing in China because in the current market it's firstly about sentiment and not underperforming somebody else. So you have to do what everybody else is doing. When you put that into perspective you will understand why we'll also discuss the forecast for China and what's the key growth power there. When you compare all of that you will see that China has to be a part of your portfolio and that will be the last thing that we'll discuss how to make Chinese stocks a part of your portfolio, how to go about the investing strategy when it comes to investing in China. Let's start. As said Chinese stocks are getting hammered out there. The Chinese stock market index is down almost 20% for the year. Perhaps it will be even more as this video gets published. The iShares China ETF has also fallen 50% over the year and especially has been falling very fast lately since Jack Ma resigned. And what happens when stocks become cheaper? People start selling. Look at the net capital flows to emerging markets. 2015, 2016 the previous stock market crash in China. First 2014 there was a bubble and you can see in 2014 big inflows if we start with the left part of the chart big inflows into stocks in China because stocks prices were going up. As soon as that changed as stocks were entering a bear market in China 2014, 15, 16 you can see big huge outflows of money from China because are you crazy to buy something that's falling in price. 2016 still declining and then in 2017 the market changed a little bit its sentiment about China but then things really exploded only in 2018 up till a few months ago when there was again look at the last data point huge outflow led from China and nobody wants to buy Chinese stocks and that's why you see the big declines in stock prices and stock in China you can see the huge decline in 2015 going into 2016 slowly going up rising 2016-17 and then again a crash since January. What's worth notifying is that it takes a very short time for stocks to crash then a long time for stocks to recover that ground and then again a short time to crash and there are several reasons for that. The first reason is the market is driven by sentiment. If I would be a normal investment manager of a fund from some big company something where I actively manage funds and okay I say Chinese stocks are cheap but Chinese stocks have fallen 20% over the last six months which means that if I put my money now into Chinese stocks those might fall another 10-20% and that's something not possible for my fund if we invest and then it drops 10-20% we would underperform all other funds that are sticking their guns to the SAP 500 which means that the clients that have trusted us with their money would pull the money out from our fund because we have performed worse than the SAP 500 funds and that means that you are not allowed as a fund manager to invest in something that is declining you should always invest in something that is confirmed less risk stock prices rising stock prices because that is something you can sell to the customer because the customer is the eventual driver of what's going on with management activity. Few value funds can do whatever they want and buy when there is value and that's the key difference to understand in what's going on in the market and where's the value in China now and especially if stocks continue to fall there will be more and more value and we have to take advantage of that but more about the strategy towards the end of this video. When the things are very positive as said 2014 in a bull market everybody was rushing into China in fear of missing out on the upside similar things before January 2018 late part of 2017 rushing into all the Chinese stocks in fear of missing out when the sentiment changes big big selling and nobody wants to buy that's why you see the big fast stock market drops but let's talk about trade wars I firmly believe that those are those fears are exaggerated these are just analyst estimates and for 2018 the earnings per share for China has been adjusted from 7.1 Hong Kong dollars to the current 6.6 since July since you have seen the biggest drops however compare those earnings with the average over 2013 to 17 and you can see that it's not worse on the contrary it's much better than what has been the case in the last years so earnings are still positive still good still better than those were in the past so the fundamentals are relatively stable and just small changes in the fundamentals don't justify all the stock price declines some stock price declines of overvalued growth stocks yes but not all stock price declines so declines which makes some Chinese companies an opportunity if you read the specific Bloomberg article from where I got this picture this situation is terrible earnings are declining and corporations have it tough war victims trade war escalation whatever a terrible terrible situation that leads to more clicks but is this article well founded on fundamentals does this article give a long-term perspective on investing of course not however if you compare two things to the SAP 500 where earnings continue to march on where everything is done that stocks push higher no matter the debt no matter anything then of course China is a big big mess a big crisis and it's up to you whether you want to invest there and take the opportunity or not stick to the SAP 500 because that's the smallest risk lowest risk investment out there at least according to the market see I in five 10 years if we look at the Chinese economy looking at the market it must be entering a recession and that is exactly the case the new economic recession definition is that if your growth has been above 6.8% and is now 6.7% annualized in the last quarter your economy is in a recession of course I'm joking but allow for some irony so China is growing at 6.7% the long-term estimates are 5% so this 6.7 when you put it in the long term is a positive surprise there be the data China and everything take it with a grain and salt but if it is 6 5 4 it's still big it's still sustainable it still leads to development growth better earnings better businesses and a better future for China so strings still strong economic fundamentals and strong business fundamentals from the earnings however the market sentiment looks like this China stocks near 2016 low have Asia markets on knife edge it's terrible it's destroyed again another Bloomberg article if you read through the article the core is that if the market falls through the 2014 support that's another negative signal and to quote any further decline in that stock market gives it an important lower low and would be quite negative the whole article no mention about fundamentals it's only about what's going on in the market and most investors see only the market as getting signals for their market decision-making for their buying and selling everybody is waiting for practically everybody else to start buying and when that happens nobody's buying they are just selling because if you hold you will underperform the SAP 500 that's going up clients will pull their money you're even forced to sell and that's why you have the negative situation on the market but still okay relatively positive situation within the fundamentals when these discrepancies arise my big opportunity sign signs my big opportunity bell rings so let's talk a little bit more about the fundamentals and what's the key factor to understand when investing for the long term in China if we look at Ray Dalio's how the economic machine works article in you can read it on Bridgewater on their web page you can see that the key for economic growth is productivity that can be brought higher with more debt or lower with the leveraging in-depthness however account accounts only for 34% of long-term economic growth and productivity growth accounts for 65% of that growth they have tested the models for the last 100 something years on a 10 year forecasting basis and it returns a correlation of 84% between economic growth and the principles of productivity and debt if we look at Bridgewater's estimations on future growth which will be the best countries for future growth of course first India as it has a lower starting base and then China real GDP growth is expected to be at 5% add inflation that's what six seven percent those are staggering numbers the United States is at 1.8 2.2% over the long term so if now it's at three it will be at one somewhere in the future because it's all based on productivity Italy terrible situation Greece Japan of course so these are the tailwinds you have to be exposed to and this is the main reason why you should have portfolio exposure to Chinese stocks China is not expected to grow at 10% as it has been the case in the past but five six seven percent five percent a healthy growth rate over the long term is sufficient to lead to a more economic growth a better time in China and good investment returns a nice example of this long-term story comes from Boeing they recently increased their forecast for new airplane demand in China they have increased it six point three percent over there two thousand that's a jet they have increased it six point three percent over their 2016 forecast so they see long-term economics growth growth growth and even bigger growth 7200 new airplanes will be added from China in the next 20 years and businesses simply continue to do businesses Alibaba Russia they invested in Turkey they are growing growing doing their own business no matter what Trump says or does so what's my stock market forecast for the Chinese stock market well I think that tomorrow Chinese people will get up in the morning will eat their rice will go to school will turn on the light will perhaps buy my book that's being translated into Chinese you can check it on Amazon or wait for the publication in China it will be even a bit cheaper if you love reading in Chinese so life will go on in China and it will grow they are ambitious they are studying they have great education results they their PISA results are among the best in the world alongside Singapore Korea I think so life will go on in China life will get better in China life will develop in China it won't be linear there will be ups and downs as there is with any economy but if you find the good businesses in China there are there is everything in China it's a economy developing fast so a lot of things there but if you find the good businesses if you diversify over five good businesses and if you're ready to accept the volatility of the market and take that volatility as your advantage then you can invest in China so let's discuss a little bit more about the strategy you know okay China will grow at five percent India is difficult to invest but if you can find exposure there perfect we'll discuss that in future videos we are focusing now this month on China so if you can invest in China it is a big country still not so developed so a lot of growth coming in front of it in the next 10 15 years China one road one belt a lot of plants a strong economy a proactive political system that intervenes before there is a problem a domestic currency domestic debt so there are risks and you can check my video on risks it will be also in the end screen but when you put that into perspective how much should you have of your portfolio exposed to China there are different ways but you can be exposed through commodities through different technologies through developed market companies that are investing big heavily in China like Starbucks so you think okay when you look at your portfolio I think that direct exposure should be around 10 15 percent 8 10 15 percent and then big bulk exposure even Apple has what a lot of sales from China so at least 20 percent of your exposure and then when you put that those things into perspective then you see okay how to play this when China is cheaper you buy more if the portfolio exposure drops from 20 to 15 you raise it to 20 when if it drops again to 15 which means it already fell 50 percent you simply raise it again to 20 then you let it grow to 30 percent when there is a bull market and then then you drop it to 20 and you compare it to other opportunities in your diversified portfolio you have to take your the volatility as your friend on individual stocks I've started covering a company I think three four months ago and I immediately put four buying ranges for the company the fourth buying range was at 25 percent of the current trading price and the stock now during to due to the turmoil in China is close to that fourth buying range when I will buy more but when I bought it first the first time the stock I had already in mind okay what if the stock drops 80 percent what would I do and that is what is happening so keep that in mind take advantage of the volatility have a strategy that you can take advantage of the volatility in China that's the key however you have to think ahead about it okay don't think this stock is now so cheap it can't go lower I have seen so many people make that mistake that's incredible you don't have to think about fundamentals you have to buy on fundamentals but don't think that the fundamentals will give protection for a stock in China it's all about market sentiment if Chinese stocks go down all those funds are forced to sell to avoid underperforming or to avoid the bad performance and then the fundamentals don't matter so don't think that a stock that is already cheap can't go cheaper that's the first thing the second thing is always be ready to buy in stages and be happy if the stocks goes down more if the stock goes down more but for that you have to think about it ahead put your buying ranges if the stock goes 80 percent down 70 percent down what do I do so it's impossible to predict how low will a stock go because it's impossible to predict well what will Trump do say or tweet not even Trump knows what he will tweet tomorrow so that's an impossible mission so think about the fundamentals and just adjust your buying strategy into stages so that you can take advantage of whatever will happen so that you can take advantage of the volatility that's the key so to conclude China will grow will continue to grow will be the most powerful economic country in the world soon I think that portfolio exposure up to 20 percent is not bad if you can put it into the right perspective and accept the volatility have volatility as your friend and then do proper due diligence proper diversification so that whatever happens with your five to ten stocks you end up well and that's the key because you are should you should not risk too much where there is so much risk if you like this video if you like Chinese stocks please subscribe we already have I think five six videos about Chinese stocks there will be plenty more JD is coming as it's the next thing that I will work an in-depth analysis of JD com what are the risk rewards and what might be the best investing strategy as it was the stock that you required the most thank you for watching subscribe like the video comment the video and I'll see you in the next video tomorrow