Few experts are as adept as Warren Buffett at determining fair value for stocks. And according to one of his favorite metrics, Chinese stocks aren't overvalued, despite the 77 percent return of the Shanghai Composite Index over the past year.
China's market has been whipsawed by violent moves in both directions recently, with the Shanghai index dropping 27 percent since June 12. "But volatility has never scared away Buffett," write Stephen Gandel and Stacy Jones of Fortune magazine
About 15 years ago, Buffett offered his favorite measure for determining whether stocks are fairly valued. It's a ratio of the entire stock market's value to GDP. Buffett sees a ratio of 70 to 80 percent as a buying opportunity, and a reading over 133 percent as a sign of overvaluation.
Buffett's gauge now "offers a surprisingly positive message [for China], especially compared to what it is saying right now about the U.S.," Gandel and Jones explain.
Through Tuesday, the ratio stood at 110 percent for China, and 125 percent for the United States, they calculate.
To be sure, many experts say the recent plunge in China's stocks, along with its slumping economic growth, could turn into the world's trouble, as many nations are dependent on exports to and investment from China. And it's not as if global growth is going great guns in the first place.
"We need all the growth we can get. A slowdown in China wouldn't help," David Joy, chief market strategist at Ameriprise Financial, told CNNMoney
China's economy officially grew 7 percent in the second quarter, which would be the slowest full-year rate since 1990. And many analysts say the latest figure for the world's second-largest economy was vastly overstated.
With 40 percent of revenue for S&P 500 companies coming from overseas, China's slowdown could hurt blue-chip stocks.
Last week, United Technologies lowered its earnings forecast thanks to China's difficulties. "The slowdown in China is worse than we had expected," the company's CFO Akhil Johri, told analysts in a conference call.
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