Stocks Roaring Ahead of the Rest of the World.
More to Come?
Shanghai Composite Index (SCI) continues to roar ahead
of other global indexes again with gains this year
of more than 35%! The news is even stronger if we
look back to the very beginning of the market's recovery
in China last year.
its worst low, the SCI followed the rest of the world's
markets to the basement in 2008 with a nosedive below
the 1500 mark. But this week the Shanghai Composite
Index burst above the 2500 level (while most of the
world's major markets remained mired in the red).
Unfortunately, investment on the Shanghai Exchange
is off limits to most foreigners but that doesn't
mean big stock moves inside China aren't important.
first message to investors is a warning. For the time
being stay away from Exchange Traded Funds that claim
to mimic China's economic growth. They do not.
most popular China ETF, the iShares FTSE/Xinhua China
25 Index (FXI) has lagged Shanghai's performance with
a gain of only 10% year-to-date. The competing iShares
MSCI Hong Kong Index Fund has done only a little better
with an eleven percent gain. The PowerShares Golden
Dragon Halter USX China Index (PGJ) rounds out the
index of underperformers with all showing losses in
the forty percent range from their peaks last year.
have they underperformed? As we mentioned in an earlier
bulletin, indexe funds that focus exclusively on China
tend to invest in the largest cap companies, and that
usually means they are usually State Owned Enterprises
(SOEs). These SOEs are often much more loyal to Beijing
than they are to retail investors. That means that
a company like China Life (LFC) will do as it's told
if it is instructed by Beijing to invest heavily in
a falling market in an effort to prop up that market.
LFC lost heavily on such market manipulation plays
like China Petroleum & Chemical Corp. (SNP), one of
the world's largest refiners, must simply absorb losses
if the government clamps on price controls. That's
why we often prefer more independent companies.
China Stock Digest is currently cherry-picking stocks
and we continue to do so in a very conservative fashion.
The Shanghai Index has hit its 250 day moving average
and isn't expected to rise a great deal further in
the very near term. Meanwhile ADRs of China-based
stocks continue to feel the negative effects of Wall
We are looking for much more of a decoupling from
western markets. On one hand we have China-based stock
markets (and the entire Chinese economy) moving strongly
into recovery mode. The Chinese Premier reinforced
that impression with a strongly optimistic statement
over the weekend. On the other hand we have "developed"
economies still mired in recession, with marginal
recovery not expected before the end of this year
at the earliest.
triggers that could drive the Shanghai Index even
higher and boost the Chinese economy even further
may be on the horizon. Industrial production in China
has ballooned by 8.3 percent in March, more than double
the previous two months. Exports are also showing
signs of a greater upward trend.
the big news we are waiting for is a second stimulus
plan from Beijing. There are rumors swirling among
credible sources in China that the government will
unveil a second stimulus plan and this one could be
more important than the $586 billion cash injection
announced last November.
best possible news from China would be a stimulus
plan directed at consumers. All sources agree that
China must consume more of what it produces because
world markets are continuing to cut back on Chinese
China has had great success with pilot incentive programs
to encourage appliance and auto purchases in relatively
believe that a national plan to boost consumer spending
and reduce China's habitual saving tendencies is in
the works. It could be announced before the end of
the week. If that happens, watch out for even more
gains among stocks traded in Shanghai and a decoupling
of Chinese ADR prices in New York from the valuations
of faltering U.S. firms.
can never again separate itself from world markets
entirely. But it is looking more and more as if China's
powerful internal economic momentum combined with
very rapid and focused stimulus measures will spread
the optimism of the Shanghai Stock Exchange to shares
traded around the world.
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