As anyone with a portfolio knows, the Chinese stock market tumbled nearly ten percent last week. In response, worldwide markets fell as well.
Now everyone is playing the prediction game: Will the markets of China, India and other emerging markets implode because they are overhyped and overpriced? Is this a repeat of the “dot-com” crash? Will the U.S. economy enter into a recession?
My two cents: no, not at all, and perhaps.
The Chinese stock market is trading at a price/earnings ratio of close to 40. A moderate range for stocks is between 15 and 20. So the market had been due for a significant — and normal –correction. China Mobile, one example of a widely owned stock, fell from $51 to $43 — yet it’s still priced at 23 times earnings. Further declines, but smaller ones, are likely. India, as the Economist recently noted, will also slow slightly to combat rising inflation.
But these declines do not resemble the “dot-com” era at all. In the late 1990s, investors poured money into companies that had an idea and a website even though they were not earning any profits. As a result, stock prices skyrocketed — and then collapsed.
However, companies in China, India and elsewhere are growing increasingly successful and are reaping larger and larger profits. Their growth rates are leaving the United States behind. The foundations and financials of most companies are solid. In the long-term, the stocks will general continue to rise.
So, no, long-term investors should have nothing to fear. The Chinese and Indian markets will not plummet and take the United States with them. Still, America does have other reasons to worry about an impending slowdown or recession: We need to get our finances in order.
