Don’t Count China Stocks Out (FXI, HOGS, BIDU, TAN, EDC)
Jim Trippon: At the close of last week, in the wake of news of a slowing economy and ongoing global worries over the European debt crisis, China’s stock markets once again fell. The week ended on a down note for China’s major indices, with the Shanghai Composite dropping to 2,315.27, down 14.56, or 0.62 percent, while the Hang Seng Index suffered a 2.73 percent loss, or 521.28 points, to close at 18,586.23.This continues a downward trend for China’s major stock indexes which began earlier in the year that has seen share prices head down on a series of disappointing developments.
Shanghai Composite Index 1 Year Chart
The Shanghai Composite began to break down earlier in the year than the Hang Seng, as the major index for Hong Kong shares held up well until August, while shares in Shanghai began to drift down in mid April. The Shanghai average hit its peak in the last 52 weeks at 3,067.46, and its recent close is near its 52 week low of 2,302.64. At last Friday’s close, the Shanghai index is off 24.5 percent from the 52- week high. Hong Kong traded shares are doing about the same, with the Hang Seng off 24 percent from its 52-week high of 24,469.
Hang Seng Index 1 Year Chart
The Recent News
The latest news that reinforced the downtrend for Chinese shares was the report of slowing growth and the outlook for slower GDP growth next year, as we touched on in our previous article. The far reaching effects of the global slowdown initiated by eurozone weakness has found its way to China, as the export trade has slowed. China’s exports to Europe fell by 18 percent in to $28.7 billion in the three month period from August through October. Nearly 20 percent of China’s export trade goes to Europe.
Global investors have demonstrated an erosion of confidence in Chinese shares this year, as a number of earlier problems in the year contributed to a lack of buying. Notably, several accounting irregularities which led to delisting for some smaller Chinese firms on US exchanges fueled the subsequent fear that the problems could be more widespread. Although that hasn’t proved to be the case with many of the larger, well known Chinese firms, the perception rattled investors’ nerves sufficiently to drain much of the enthusiasm for Chinese shares. Also, questions about some of the business structures of China’s internet companies, as well as short selling attacks on other Chinese stocks, have led to investor caution.
In the face of much of the hysteria about China and its economic prospects, investors should keep it all in perspective. The calls by many of the most vociferous China bears have predicted a property bubble collapse for a couple of years, while others predict a banking collapse, and still others maintain essentially that all Chinese accounting and financial reporting is either untrustworthy or fraudulent. Now others, in the wake of the recent economic slowdown, are predicting China’s economy will not only suffer a hard landing, but stunted growth for the next several years.
Just how accurate are these views? Of course predicting the future for economies and markets is rife with peril, yet investors should focus on the evidence. The GDP growth, which slowed to 9.1 percent in the recent quarter, is still well beyond anything in developed markets. Even if the growth rates slides to 8 percent or even in the 7 percent range next year, this will hardly cripple China’s growth or economic future. The corollary is that inflation has been cooling. Earnings from many of its largest publicly traded firms, such as the SOE major oil companies, have still been impressive, as have been the results from bellwether Baidu (NASDAQ:BIDU) and other internet leaders. Agriculture business such as pork producer Zhongpin (NASDAQ:HOGS) is thriving, as are medical and other healthcare industries. The solar industry (NYSEARCA:TAN) is definitely feeling pressure, but many of its best firms should rebound as the demand for solar energy improves in the months and years ahead.
The Shanghai and the Hang Seng indices reflect largely Chinese ownership and trading on shares. The ADRs and ADSs, much more popular among global and US investors, which feature well known companies such as Baidu’s shares and others, are listed on US exchanges. The Bloomberg China-US 55 Index, which features the most traded Chinese names, is trading more in the middle of its 52 week range, while the iShares FTSE China 25 Index Fund ETF (NYSEARCA:FXI) is also trading closer to its mid 52week range. So what might that say? Global investors have not punished all Chinese shares. There is some investment interest.
iShares FTSE China 25 Index Fund 1 Year Chart
No one is dismissing the importance of the problems in China’s economy, or the possibility of difficulties ahead. But a look at China in the longer term-which is how China views itself-sees its economy facing challenges which may be manageable. The Shanghai Composite chart over the last five years suggests the Chinese market may be bottoming or perhaps even basing. No one knows for sure whether the next move will be up or down, it’s true. When will China’s stocks resume their rise? It’s hard to tell, but don’t write China stocks off just yet.
Shanghai Composite 5 Year Chart
Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.
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