There’s No Stopping Chinese Stocks

by George Leong, B. Comm.

Markets in the U.S. are again in rally mode. The DOW is positive on the year and the NASDAQ is now up over 20%. The optimism appears to be there, but there are still questions regarding the sustainability of the stock markets given the contracting GDP and economic risk.

While I’m encouraged by the U.S. and Canadian markets, I highly emphasize the fact that you should have some capital in other stock markets outside of North America. Latin America shows great growth opportunities, especially in Brazil. Europe is also attractive given the European Union marketplace of over 300 million people. In Asia, India will continue to be a place for excellent growth. Yet the region where I continue to see the best growth opportunities is China.

The reality is that there appears to be no stopping Chinese stocks. The benchmark Shanghai Composite Index (SCI) is continuing its death-defying aerial act and is up a staggering 80% to date in 2009. That is impressive by all accounts, especially when compared against U.S. returns.

A look at the chart of the SCI, as of July 20, shows the index currently in a strong upward trend above the short- and longer-term moving averages. The index is trading above the key short- and longer-term moving averages. Watch for some support at the 20-day moving average at 2,728 and the 50-day moving average at 2,608. As long as the trend remains intact, the SCI looks good and could trend higher. Of course, given the high returns, there is the potential of profit-taking and a relapse on any major negative news towards China. If you are invested in Chinese stocks, you probably have some impressive gains on the books. My advice is to take some gains. For instance, if you are up over 100% in one stock, take profits on half of the position and let the other half ride.

The bottom line is that China remains a key component of the global economic machine, and it will need to stabilize its economy otherwise the ripple effect to the rest of the world could be devastating. The country’s GDP, which had been slowing this year, grew 7.9% in the second quarter, up from 6.1% in the first quarter, according to the National Bureau of Statistics (NBS). The GDP growth is encouraging, but the NBS also warns that the economy in China continues to be characterized by uncertainty. The Ministry of Commerce in China reported that foreign direct investment fell 6.8% year-over-year in June. It was the ninth straight month of decline, but it was an improvement over May, suggesting a rebound. In the key export market, China saw its exports fall 21.4% year-over-year in June, an improvement over the 26.4% decline in May. Watch exports, as they will continue to be a key driver of China’s growth.

I have discussed China in other commentaries and continue to emphasize the need to have some capital there. This will allow you some significant geographical diversification. The key is to make sure your portfolio is properly diversified as to region, market-cap, and industry.