The Beginning of a New Trend

by Mitchell Clark, B. Comm.

The news that the manufacturing sector has been improving around the world was significant and represents a very positive tone for investors. In the U.S. and Europe, the news was that the sector contraction was slowing. According to the numbers, China’s manufacturing sector expanded in July at its greatest rate in a year. What’s happening in China is that domestic demand is offsetting a weak export market. This is a very positive development for that country. Whether we like it or not, China’s domestic wealth affects our own. Just think about Buick’s success as a global brand. It can’t do it without China.

It’s difficult to tell where things are going to go in our economy; anything could happen. Still, the recent data on manufacturing, durable goods, consumer spending, and housing can only be considered as positive. The only area that hasn’t turned a corner yet is employment. This likely will take the rest of the year.

I still can’t get over the price of a barrel of oil, which just recently broke the $70.00 level. Speculators in oil are trading on the future of the economy. I tend to view oil as overpriced right now. I do think, however, that the price of gold is fairly valued. That commodity has been trading between $900.00 and $1,000 an ounce for quite a while. It could be that investors are actually thinking of China when it comes to both gold and oil prices. China’s appetite for raw materials has not abated. If that economy goes back to double-digit growth, then it’s going to be boom town again for precious metals and other commodities.

As you know, we did have a big run-up in commodity prices based on China’s growth story; then the bubble burst. I think we’ll get a resurgence in a similar kind of way and that investors will benefit by owning some kind of fund or ETF that is exposed to commodities. The pure play trade on China stocks has already panned out. My favorite China ETF is the FXI on New York Stock Exchange and this fund has appreciated about 20% just in the last two weeks. Clearly, Chinese stocks are due for a little break, because they’ve had a strong run over the last couple of months. They will continue, however, to lead the global equity market going forward and I certainly wouldn’t bet against them.

The news that domestic demand is driving China’s increase in manufacturing is very important and it represents the beginning of a shift away from its dependence on exports. If this trend holds over the next several years, this could results in a major new wave of domestic wealth creation in that country. For investors, exposure to China is a must over the next decade.