In an overvalued world, China starts to look most attractive

The final analysis while the uncertainty over GCC markets is still making regional investors jittery, the outlook internationally is almost as difficult to read.

While the uncertainty over GCC markets is still making regional investors jittery, the outlook internationally is almost as difficult to read. Not many people are saying that the European or US stock markets are going to bounce in 2010 like they did starting in March this year; indeed, Andrew Smithers, who wrote Valuing Wall Street and is much loved by mutual fund managers, says stocks are above "fair value".

That view is supported by Robert Shiller, who is known these days for the Case-Shiller housing index and made his name with the book Irrational Exuberance, which predicted the dotcom bust; he is decidedly un-exuberant. John Hussman, who was recently added to the "Guru Focus" hall of fame, and whose fund lost only 0.3 per cent while the S&P500 lost more than 40 per cent up to the end of October 2008, remarked recently that the "myopic" seers on Wall Street have "driven stocks to the point where they are not only overvalued again, but strikingly dependent on a sustained economic recovery and the achievement and maintenance of record profit margins in the years ahead".

And for all its current shine, gold is an acquired taste. Its current price reflects the level of sentiment about whether the vigorous reaction to the crisis will carry with it collateral damage or whether the "money police" have finally run out of ammo. Even the ultimate refuge for the faint-hearted, US Treasuries, aren't necessarily a safe bet anymore, even if you believe in the deflationists. There has to come a time when the buyers will start demanding a better yield, regardless of whether the US Treasury maintains its policy of selling short term to finance the "War on Toxic Assets".

Besides, the US Federal Reserve can't be relied on as the "buyer of last resort" forever. Banque National de Paris is talking about the 10-year yield going up to 5.5per cent, which would mean a 15 per cent drop in price, and they're not the only ones getting skittish; the consensus is that even though the economic climate is improving, corporate yields are not going to go down so much as the benchmark is going to go up, so although corporate bonds were a good refuge over the past year, that's not necessarily a given anymore.

So what's left? Personally, I've always been hugely suspicious of China; the idea of a party-member commissar of a communist state policing insider trading scams or protecting minority shareholders is almost too absurd to contemplate. Plus, there are plenty of "bubble warnings" from people who are suspicious that the 75-per-cent climb in the Shanghai Stock Exchange (SSE) was funded out of credit rather than cash.

But even though the SSE is almost back up to the level where everyone was screaming "bubble" in August (from where it plunged 25 per cent in September), there is no argument that fundamentally the Chinese currency, the renminbi, is the strongest currency in the world. Certainly if the renminbi appreciates, the stock market might falter, but in dollar terms that might make little difference for a long-term investor.

One thing China has got that is in short supply these days is the capacity to grow. Granted, the driver is a conflicted mixture of central-planning and free-market economics, but regardless, that's what has somehow driven China to the centre of the world stage, and lately that growth has been guided much more by the awakening Chinese consumer than by exports, which now constitute just 20 per cent of the economy.

I'm starting to move towards buying the idea of the sustainability of China's success story, and even though few people claim to fully understand it, that story is somehow more credible than the endlessly changing optimism of the left-behind mandarins with all their New-World-Order economic strategies that manifestly failed. Andrew Butter is a financial analyst based in Dubai.