Are Chinese Stocks Poised To Go Higher? (FXI, FXP, VWO, EEM, SINA, BIDU)
Jim Trippon: At the quarter pole of this year, the Shanghai Composite Index finished an eventful three months which saw the year start out with a bang, only to see the rally in China stocks (NYSEARCA:FXI) briefly run out of steam, as it gave up some of its gains with a whimper. Investors are divided as to what the direction for Chinese equities looks like in the next quarter and farther into 2012.
The Rise And Fall
After a two year downturn for the Shanghai index, 2012 began the year with the average at 2,169. By early January, Chinese equities began their determined upward march to 2,460, a 13 percent increase accomplished in only two short months. By early March, however, the rally lost its momentum, as the average turned down more than 200 points, a partial retracement that took the index to 2,252 just prior to the end of the first quarter. The retracement gave back roughly 8 percent of the previous advance, more than half the gains achieved earlier in the quarter.
Shanghai Composite 3 Month Chart
Source: Yahoo Finance
The factors which led to the rally in the first place included lower inflation, which finally fell to levels around the 4 percent target deemed by Beijing as acceptable. This co-existed side-by-side with what was still considered robust growth in China’s GDP. The GDP growth for the fourth quarter leading into the start of 2012 was 8.9 percent, while growth for all of 2011 still topped 9 percent. At that point, the effects of Europe’s ongoing debt crisis hadn’t dragged China’s export growth down. That came a little later. While the S & P 500 shared Shanghai’s rise in the early part of the year, it didn’t give back the gains as the US economy, despite its painfully slow recovery, was seen as relatively healthy, one of the healthiest in the world. Tentative steps at policy easing by Beijing through its central bank failed to find enough support among investors to continue the rally in Chinese equities. With the further cooling of China’s economy, many investors abandoned Shanghai shares or lightened their commitments to the Chinese ADRs which had just begun to recover their popularity among US investors. The talk of a hard landing for China’s economy poured more cold water on the fire for Chinese equities.
Many investors will want to fold their tents if they’ve concluded the positive story for Chinese equities is over for this year, but that looks like a mistake. The retracement in the Shanghai average may be a temporary lull. In a Breakout interview with Matt Nesto, David Steinberg, founder of DLS Capital, sounded as though he thinks investors may be missing the story. Even with slowing GDP in the near term, Steinberg pointed out the Chinese economy is still growing and that “demand is picking up.” Steinberg also thinks the short term is being over-emphasized at the expense of the long term positives for China.
What Has To Happen?
For the story to be more positive in the near term, outsized growth does not have to happen for China’s economy. Indeed, the very lagging growth according to the indicators such as the PMI, the export trade, and the recent soft profits of the large, state owned enterprises, should be the conditions that lead to the very path for Chinese stocks to start to move higher again. The policy easing needs to and most likely will pick up.
China Inflation Rate
Easing To Pick Up Steam?
The signals sent by the sagging growth rate in the Chinese economy near term along with the recent retreat of the stock market, are certain signals that Beijing is reading. The question is how soon will it pick up the pace of its easing measures? Although China’s central planners want to stick to a gradual mode, there’s nothing in that approach that prevents them from putting their foot on the accelerator a bit more. They can simply apply some of the policy tools they’ve been using, but with a little more push: the reserve ratio requirement for banks can be cut yet again, as well as loosening further credit for small and medium enterprises (SMEs); also providing greater liquidity by further increasing the money supply can be an additional push. None of these measures is likely to overheat the economy; instead, the series of more coordinated moves set out at a brisker tempo should keep growth going along reasonably while buoying Chinese stocks.
Related: Vanguard Emerging Markets ETF (NYSEARCA:VWO), ProShares Ultra Short FTSE/Xinhua China 25 ETF (NYSEARCA:FXP), iShares FTSE/Xinhua China 25 Index (NYSEARCA:FXI), iShares MSCI Emerging Markets Indx (NYSEARCA:EEM), SINA Corporation (NASDAQ:SINA), Baidu.com (NASDAQ:BIDU).
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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