Time to Look at Chinese Stocks Again?

Time to Look at Chinese StocksThere are still many on Wall Street who frown on Chinese stocks and China. When word was spreading that the country’s real estate market was going to implode, China was a cesspool for capital.

Well, I don’t belong in that group of investors. Many of my readers will recall how I remain bullish on China and Chinese stocks in particular. Just take a look at many of the top-performing stocks over the past few weeks, and you’ll see that there are numerous Chinese small-cap stocks charging up on the charts. The buying has been driven by a move to seek more returns in regions, like China, that have largely not followed U.S. stocks higher.

Take a look at the S&P 500, as shown by the red candlesticks in the chart below, versus the Shanghai Composite Index, as reflected by the green line.

The obvious finding is that the S&P 500 has continued its upward move, while the Shanghai Composite Index has been unable to find any rhythm on the chart, based on my technical analysis.

S&P 500 Large Cap Index Chart

Chart courtesy of www.StockCharts.com

In my assessment, the divergence between the two indices has resulted in a buying opportunity for Chinese stocks.

Since making its initial acquisition in a 20% stake of specialty chemicals maker China National BlueStar in 2008 for $600 million, private equity firm The Blackstone Group L.P. (NYSE/BX) has been steadily involved in buying Chinese companies. Blackstone just signed a definitive merger agreement to buy China-based IT services firm Pactera Technology International Ltd. (NASDAQ/PACT) in a $600-million deal. Of course, the Chinese government, via its overseas investment fund, invested $3.0 billion in Blackstone back in 2007, which clearly is a factor.

The reality is that China continues to hold vast opportunities for investors. The country is not set to implode; in fact, it’s showing decent growth, while the rest of world appears to be struggling.

China’s gross domestic product (GDP) growth expanded at 7.8% in the third quarter, according to the National Bureau of Statistics. (Source: “Overall Economic Development Enjoyed Momentum of Steady Growth in the First Three Quarters of 2013,” National Bureau of Statistics of China, October 18, 2013.) The reading was the highest pace of growth this year, and it runs counter to the views by some pundits who predicted the Chinese economy would only see growth in the five-percent range this year.

In addition, industrial production grew at a healthy 10.2% year-over-year in September. Fixed asset investment also continued to be strong, growing at 20.2% year-over-year in September.

Consumer spending, a key area of the country’s growth strategy to drive domestic spending, continues to rise. Retail sales, while stalling on this side of the Pacific, expanded at 13.3% year-over-year in China in September.

The bottom line: smart investors should consider looking at moving some capital to Chinese stocks for added returns. (Read “Your Portfolio Stopped Growing? Here’s Why You Really Need to Think Chinese.”)