— by George Leong, B. Comm.
The rally in Chinese stocks this year has been quite impressive. In China, there is also 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, although at a slower rate than the previous years. Yet, there are some encouraging signs. According to the State Information Center, China’s GDP could grow seven percent in the second quarter, up from 6.1% in the first quarter. That is strong growth.
The benchmark Shanghai Composite Index (SCI) is up an impressive 42.42%, as of May 6, compared to the U.S., where the top performing NASDAQ is up 11.22%. The S&P 500 is at breakeven, while the DOW is down 4.17%.
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 key is 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 program, which, unlike the U.S., is easier to implement, as it does not require approval. And given that China now has close to $2.0 trillion in foreign exchange reserves, it is up 16% year-over-year. For those of you who have been patient after the downtrend in Chinese stocks, it is paying off.
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 China, 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.
The price chart of the Shanghai Composite Index shows the index currently in an upward move after breaking above 2,000. The index is trading above the key short and longer-term moving averages. Watch for some support at the 20-day moving average at 2,328.
In spite of the higher risk in China-related stocks, we 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). Note that these are only examples of stocks to consider; we are not specifically recommending them.
As we move forward, I continue to expect excellent potential and growth surfacing from China. The country has plenty to offer for the investor looking for international growth opportunities. Continue to add Chinese stocks to your well-diversified portfolio.