Where the Nice Gains Are

by George Leong, B. Comm.

U.S. stock markets are continuing to rally. It is nice to see, but there are much better gains elsewhere. Technology leads the market this year, with a current gain of over 16%, while the S&P 500 and Russell 2000 are both up just over four percent. Compared to earlier in the year, the rally from the March lows has been impressive. Yet, as I have emphasized, you should also make sure you are diversified in other major foreign markets in Asia, Europe, and Latin America.

Just take a look at China. The benchmark Shanghai Composite Index (SCI) is up an impressive 50% this year, as of June 2, and shows little inclination to reverse given that the valuation continues to be reasonable and on the cheaper side compared to U.S. stocks.

As many of you know, I have been a solid supporter of Chinese
stocks even during the trying times in 2008, when they were the focus of intense selling. My patience has paid off, given the recent gains.

In China, there is evidence that the world’s top growth market will turn this year and this is important for the global markets. My feeling is that China will continue to be the key growth region going forward. While numerous global economies are contracting, China is continuing to grow, albeit at a slower rate than the previous years. According to the State Information Center, China’s gross domestic product (GDP) could grow seven percent in the second quarter, up from 6.1% in the first quarter. That is strong growth.

The rise in the SCI demonstrates what I continue to believe is the top growth region in the world. Chinese stocks listed on U.S. exchanges are also rallying well off their lows, while maintaining extremely attractive valuations. The keys to success are patience and buying only small positions, so as to not risk too much capital.

The buying of Chinese stocks has been driven by optimism towards China’s massive economic stimulus and infrastructure program. And given that China has over $2.0 trillion in foreign exchange reserves, paying for all of the stimulus will not be an issue for China. In fact, China has been a major buyer of U.S. debt, thus helping to fund President Obama’s economic stimulus spending.

Going forward, I continue to favor China for growth investors who have a long-term view. I like the longer-term situation in China and believe you should have some capital invested in this country, whether it is with large-cap, blue-chip Chinese companies or with small, emerging higher-risk stocks. Areas that I like longer-term are infrastructure, industrial, retail, and services such as insurance, banking, technology and advertising.

In spite of the higher risk in China-related stocks, I believe it would be an error to bypass the country. In reality, investing outside of the U.S. helps to diversify returns and add some growth potential.

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, such as eBay Inc. (NASDAQ/EBAY), Dell Inc. (NASDAQ/DELL), QUALCOMM Incorporated (NASDAQ/QCOM), Nike, Inc. (NYSE/NKE), Best Buy Co., Inc. (NYSE/BBY), and Wal-Mart Stores, Inc. (NYSE/WMT).

As we move forward, I continue to expect excellent potential and growing surfacing from China. The country has plenty of growth for the investor looking for international growth opportunities. Continue to add Chinese stocks to your well-diversified portfolio.