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Ameriprise Financial, Inc. : Good Time to Bet on China?

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10/15/2012 | 04:37pm EDT

Since reaching a post-crisis high in August 2009, the Shanghai Composite Index of Chinese equities has fallen 40 percent. During that same interim, the S&P 500 has risen 40 percent. Both indices reached their historic highs in October 2007. But, whereas the S&P currently sits just 9 percent below its high-water mark, the Shanghai index is currently 66 percent below its peak. So, is it now time to consider buying Chinese equities?

First, a little more background. During the two years of 2006 and 2007, the Shanghai Composite Index rose parabolically, delivering a staggering 350 percent return. At its price peak, the trailing price/earnings ratio was 44x, compared to the S&P at 17x at its high price. Clearly, a bubble had formed in Chinese equities, driven by euphoria over global growth rates and the voracious appetite for cheap Chinese imports. A newly minted class of Chinese domestic equity investors with few other investment options helped to fuel the rise. But the financial crisis dramatically dulled the appetite for Chinese imports, and growth in China has slowed from year-over-year rates of 10.4 and 11.2 percent in 2006 and 2007 to 7.8 percent currently. And many China watchers believe the actual current growth rate to be well below the official rate. The third quarter number will be released later this week and is expected to show a further slowdown to 7.4 percent.

The steady decline in the Shanghai Composite leaves it with a current P/E ratio of just 11.5x. The S&P currently is trading at 14.5x. So, with the excessive valuation having been washed out, on a relative basis Chinese equities arguably look cheap. But what are the prospects for improving economic growth and rising equity prices? The transition to a more balanced economy with rising domestic demand is a slow process. Savings rates remain high and the population is aging. And housing inflation remains an official concern. If the Chinese economy is still predominantly reliant on its export industries to fuel growth, improvement is likely to be slow with the developed world expected to grow at just a 1.5 percent rate in 2013, according to the IMF. The manufacturing Purchasing Managers Index has dipped below the 50 level in each of the past two months.

There is little China can do to alter that outlook, which means that it must look inward. Monetary policy has been loosened, as bank reserve requirements have been eased and interest rates have been cut. But the last move came in July and there is room to do more. Consumer inflation slowed to a rate of 1.9 percent in September. Domestic demand remains healthy, but has softened recently. Both the non-manufacturing PMI and retail sales growth have slowed, as have loan growth and the money supply.

China is mindful of its fiscal and monetary resources and their ability to stimulate domestic demand. But it does not want to repeat the excesses of the stimulus effort following the start of the financial crisis, which led to wasteful spending and property inflation. If new stimulus spending is to come, speculation is that it will follow sometime after the new political leadership takes over at the National Communist Party Congress which convenes on November 8. If further action is taken, consumer stocks will likely benefit. And if infrastructure projects are targeted, industrial and materials stocks will benefit as well, including those domiciled in the U.S. and other countries which enjoy robust trading relations with China.

Important Disclosures:

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

The Shanghai Composite Index is a capitalization-weighted index of all stocks on China's Shanghai Stock Exchange.

The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.

It is not possible to invest directly in an index.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.

Brokerage, investment and financial advisory services are made available through Ameriprise Financial Services, Inc. Member FINRA and SIPC.

© 2012 Ameriprise Financial, Inc. All rights reserved.

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Financials (USD)
Sales 2019 11 776 M
EBIT 2019 2 551 M
Net income 2019 1 980 M
Finance 2019 623 M
Yield 2019 2,57%
P/E ratio 2019 10,3x
P/E ratio 2020 9,30x
EV / Sales2019 1,64x
EV / Sales2020 1,51x
Capitalization 19 881 M
Duration : Period :
Ameriprise Financial Inc. Technical Analysis Chart | MarketScreener
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Technical analysis trends AMERIPRISE FINANCIAL INC.
Short TermMid-TermLong Term
Income Statement Evolution
Mean consensus OUTPERFORM
Number of Analysts 13
Average target price 168,92  $
Last Close Price 148,47  $
Spread / Highest target 36,1%
Spread / Average Target 13,8%
Spread / Lowest Target -2,34%
EPS Revisions
James Michael Cracchiolo Chairman & Chief Executive Officer
Charles Neal Maglaque Chief Operating Officer
Walter Stanley Berman Chief Financial Officer & Executive Vice President
Randy Kupper Chief Information Officer & Executive VP
Siri S. Marshall Independent Director
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