China Shares Show Signs Of Life (VWO, FXP, FXI, EEM, EWJ)
Jim Trippon: On the last trading day in June, the Shanghai Composite Index rose smartly with a 29.59 point surge to hit 2,25.43. The 1.35 percent increase on the day for the trading average was a bit of good news in a market that has been desultory for much of the year. The rise, in fact, was the first in eight days, and was largely attributed to the hopeful response regarding the European debt crisis talks. The eurozone debt has cast a pall over the world’s stock markets for much of this year, as the global realization set in this spring that not only was the European problem having a longer, deeper effect on the continent, but that its viral effects were spreading globally. What investors were trying to figure out, and the markets reflect this, is how much damage Europe would do to the economy.
Shanghai Composite One Year Chart
China’s Trade Partner
What has been fortunate for China in the past is its robust trade with Europe, where the continent has been an eager market to snap up Chinese made goods. This contributed to the healthy export trade for China, but much like in any financial crisis, or realization of such a crisis, the market dried up rather quickly. Europe seemed to stop importing much of anything, from solar panels to many manufactured goods. This was the catalyst to China’s slowdown, or perhaps more precisely, the secondary wave of slowing down on top of the cooling of the economy which Chinese economic policymakers had been engineering in the first place. So the European economic slowdown—almost a halt, really, spread to further slow the Chinese economy which had been slowing by its own hand and its own design. This latter point is often missed or skirted over by the financial media, but as venerable eclectic investor and China bull, Jim Rogers attests, “China was already trying to slow its economy for the last couple years.” He cited the overheated property market, and we would add the ratcheting up of the benchmark interest rates in response to that, which went on until mid-year last year.
So, that brings us to the present. Investors have been reacting as though Europe was China’s only market and that its export trade consisted of no other partners. Not true. The rest of the Asia-Pacific trade is still ongoing, as well as the US trade. Only Europe is actually in the kind of doldrums that the markets have acted as though is universal. Chinese GDP growth, for example, is still projected to hit 7 percent to 7.5 percent for the full year 2012. Although the markets grade on a steep curve, which is to say that 7 percent in China is regarded as something like flat or zero GDP growth would be for the US, the 7 percent in the face of the eurozone crisis, with China’s significant trading partner in a continental funk, is still substantial.
The Stock Story
Chinese stocks, individually and collectively, have been punished. It doesn’t matter if they’ve been ADRs traded in the US or Chinese shares traded domestically in Shanghai, investors and the markets have a bad case of the euro-blues. The sag began in earnest after May 4, when the Shanghai Composite hit 2,451, as the average has traveled down to 2,195 before its end of the quarter surge. And that brings us back to the rally on the final day of June. The reaction was, again, to things European, as the euro leaders got together and decided to ease the repayment conditions on loans for Spanish banks. Like everything else in the euro crisis, however, we’ll have to wait and see if this is a solution, or rather a measure, that sticks. The Spanish banks and Spain’s economy seem to be teetering so much so that in the land of Cervantes, any propping up might seem, well, quixotic.
Bank Of China Three Month Chart
Still, at some point, if Europe muddles along with its bump-after-bump of stopgap measures, investors may notice for Chinese equities what they’ve noticed for US stocks, that there’s value there, that everything is not European nor should it revolve around Europe, that although the problems are wider and deeper in Europe than their leaders had admitted, the rest of the world muddles on. The European leaders are, in their halting way, attempting to contain their crisis, and anything they do lowers equity risks. Many Chinese companies are doing good business, so their stocks will eventually get noticed. At some point, bargain hunting will ensue.
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 Index (NYSEARCA:EEM), iShares MSCI Japan Index (NYSEARCA;EWJ).
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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