Chinese Stock Index up a Stellar 75%

Calling The Trend Column, by George Leong, B.Comm.

A look at the chart of the benchmark Shanghai Composite Index (SCI) in China says it all. The comparative performances of the Chinese and U.S. stock markets this year tell us the story and it is spectacular. The DOW is down five percent, while the country’s best-performing NASDAQ index is up about 14%. Even the growth-oriented Russell 2000 is down about one percent. Those of you who bailed out of Chinese stocks in 2008 when the SCI was selling off are probably asking yourself why. In China, the SCI is currently better than gold, which incidentally is favored by the Chinese. It is up a whopping 75% this year as of July 15, after breaking above 3,000. The index is trading above the key short- and longer-term moving averages. The comparative returns between the U.S. and China emphasize the importance of geographical asset diversification outside of domestic markets to try to achieve greater overall portfolio returns. It’s that simple.

The chart of the SCI shows the index currently in a nice upward trend above the short- and longer-term moving averages after breaking above 3,000. Watch for some support at the 20-day moving average at 2,997 and the 50-day moving average at 2,805. As long as the trend remains intact, the SCI could be headed higher.

As we have been saying, the rise in the SCI illustrates our continued belief that this country is the top growth region in the world. Chinese stocks listed on U.S. exchanges have been showing some impressive gains in the recent weeks and months, while maintaining extremely attractive valuations. There is some selling in U.S.-listed Chinese ADRs at this time due to the broader market weaknesses, so you may want to take some profits. The key is patience and buying only small positions, so as to not risk too much capital.

China continues to be the region for growth opportunities. We are seeing the Chinese economy show signs of recovery due to the massive US$586-billion economic stimulus plan there and the fact that the spending will not hurt the county as building debt. With over $2.0 trillion in foreign reserves, China has money to spend. The government there also has total authority.

The World Bank recently upgraded China’s GDP growth for 2009 to 7.2%. Compare this to the contraction in the U.S. and parts of Europe and you’d understand why we have been positive on China and Chinese growth stocks.

If you hold Chinese stocks listed on U.S. or Canadian exchanges, we are seeing some buying. We have been surprised by the degree of the selling action and believe it was more to do with speculators dumping stocks. And even if you factor in the slowing in China’s GDP, the current valuations remain intriguing and the country remains a growth market for many sectors.

The key to investing in China is to be diversified. Invest only a portion of your capital in China. Besides small-cap stocks, you can also buy large-cap Chinese stocks or major U.S. companies with an expanding presence in China.