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China: Year of the Snake Could Sizzle

Thursday, January 10th, 2013
By for Profit Confidential

China: Year of the Snake Could SizzleMany pundits continue to criticize Chinese stocks, saying China will collapse and face a hard landing—but I’m not one of them. In fact, I’m more optimistic for 2013. The country will be under new leadership with the goal to accelerate the country’s gross domestic product (GDP) growth over the next decade, and you should be there for the ride with some Chinese exposure in tow.

The Shanghai Composite Index (SCI) closed at 3.16% in 2012, following a strong end to the year. It was the first up year for the SCI after declining 21.7% in 2011 and 14.3% in 2010. Early on in 2013, the SCI is positive, and I expect an up year if all pans out.

China has managed to avoid the feared hard landing and is showing signs that growth is coming back, albeit slowly. The country appointed a new President and Premier at its 18th National Congress of the Communist Party of China, who will lead the country for the next decade. (Read “Never Mind Obama and Romney; Watch for Jinping and Keqiang.”)

If things go well and China opens up more to the world stage, the next decade could be special for the country. The change at the helm comes at a critical juncture; the country is currently facing stalling economic growth after years of explosive GDP growth that propelled the country to overtake Japan to become the world’s second-largest economy.

China’s GDP growth is estimated to rise to rally back above 8.0%–8.5% in 2013, down from the previous 9.3% estimate, according to the Organization for Economic Cooperation and Development (“OECD Cuts China GDP Forecast, Sees Policy Room To Back Growth,” MNI, November 27, 2012, last accessed January 9, 2013.) Of course, there is still risk and uncertainty, as the country’s economic recovery will be dependent on what happens in the eurozone over the next few years.

While many are ditching the country, I continue to be a Chinese bull looking forward. I feel the golden years for the country are still to come. Just consider the 1.3 billion people, the surging middle class, rising income levels, and the concerted government move to continue to drive the country’s economic turbines to expand the country’s power.

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The HSBC Purchasing Managers’ Index slowed in December, but manufacturing activity still came in at an expansionary 51.7, down from 52.1 in November. (“China services growth slows in December: HSBC PMI,” South China Morning Post via Reuters, January 4, 2012.)

Unlike the United States, China has ample cash reserves of over $3.0 trillion that it can use to pump up the economy, which is a key reason why I’m a huge supporter.

The outgoing government stressed its desire to power the Chinese economy forward and double GDP by 2020.

The selling in the top Chinese stocks listed in China and Asia has been overdone. If you want to play the top Chinese companies, or what I call “China’s DOW stocks,” take a look at the iShares FTSE China 25 Index Fund (NYSEArca/TXI).

 

iShares FTSE China 25 Index Fund Chart

 

 Chart courtesy of www.StockCharts.com

 If you are looking for more risk and return with more growth-oriented companies, take a look at the PowerShares Golden Dragon China (NYSEArca/PGJ).

 

PowerShares Golden Dragon China Chart

 

 Chart courtesy of www.StockCharts.com

The bottom line is: I continue to like China longer-term. There is no doubt in my mind that the country could become a more influential and powerful country economically.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles