China’s Economy: Buy Now for Long-Term Outperformance

Last Saturday Chinese Premier Wen Jiabao, the top official in charge of economic policy, spoke about the state of China’s economy following a meeting with German Chancellor Angela Merkel.

The second quarter slowdown, the Mr. Wen explained, was the intended outcome of government efforts to prevent the economy from overheating. China was the first major economy to recover from the global recession and has been running well ahead of the pack for some time now.

Mr. Wen said the government’s basic macro aims are to achieve steady though relatively fast growth, implement necessary structural changes and manage inflation expectations. He also noted that the government will work to sustain growth momentum and boost domestic demand during the second half of the year.

The Chinese premier seems comfortable with the government’s efforts to guide the economy thus far. Investors shouldn’t expect an additional stimulus package this summer, as has rumored in recent weeks. Moreover, it should be clear by now that Chinese authorities did more than enough to help the economy emerge from the recession and have made the right moves to slow things down a bit.

As I’ve previously forecast, China’s economy will continue to consume at prodigious rates throughout 2010 and into 2011, and the reality of rising inflation will also prove to be tamer than the great threat the market is currently pricing. Buying the right stocks now will lead to profits that will make your year’s end celebration a memorable one.

I continue to expect China’s economy–and Asia as a whole–to easily outperform over the next couple years. The region is not restrained by the private and public balance sheet problems plaguing economies the world over.

Asia is, structurally, best situated to benefit from changes taking place across the economic and investing landscape. It should eventually trade at a big premium–in the neighborhood of 25 percent–to global markets because of its superior economic and corporate fundamentals as well as its still-prodigious growth potential.

Beyond China’s economy and the broader Asia story, a global perspective requires comment on the turbulence in Europe’s economies and markets. All is not lost: The latest date reveal strong production growth that compares favorably to the rest of the developed economies.

The disdain most investors now have for European assets along with the fact that corporate leverage is low on the aggregate and valuations are historically low means European stocks are becoming very attractive. My preferred market is Germany, though the UK market, which is trading at favorable valuations relative to other developed markets, is also home to some bargains.

The UK has traditionally been a defensive one, and it should perform well during the upcoming global economic slowdown. Economic numbers have also surprised to the upside, and the new government is poised to protect the economy from losing all its competitiveness and the country its strong credit rating.

The bottom line is buy China’s economy and look to Germany and UK to complete a well-rounded portfolio that’s poised to profit through 2010.