Nobody Said this Was Going to Be Easy

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

A lot of smaller benchmark companies will very soon report as we go into March. One company you’ll want to pay attention to is E-House (China) Holdings Ltd. (NYSE/EJ). This Chinese real estate brokerage has extensive operations throughout a number of China’s provinces and what it reports in early March will certainly give us a good idea about the state of that country’s real estate bubble.

Whether we like it or not, what happens in China now affects our capital markets; so it’s wise to keep an eye on what real companies are saying, not just government departments.

Another company to follow is China Automotive Systems, Inc. (NASDAQ/CAAS), which is an auto-parts supplier that sells mostly steering components. This growing enterprise recently entered the North American auto-parts market and what it says about its business will be an important benchmark for investors in China.

Certainly there are a lot of opportunities in the Chinese marketplace, but there is also an endless amount of investment risk. Even if we ignore domestic Chinese stocks and focus only on U.S.-listed issues, a lot of these stocks are extremely volatile and very susceptible to changes in investor sentiment. Only when sentiment is strong in the domestic capital markets do Chinese stocks tend to roar. It’s a peculiar trading action that I think has all to do with a risk-premium associated with these businesses.

In most cases, Chinese business growth is strong, but it’s also unpredictable. Chinese solar energy companies were a real lesson for investors. They were some of the hottest stocks on the NASDAQ when the anticipation of high growth was all the rage. When the numbers actually came in, investor interest faded, as the hype didn’t match the reality. I suppose the best trading strategy for Chinese equities is all about betting on expectations. Buy on rumor, sell on news. It’s been a trading reality for American equities for years.

Anything could happen to your Chinese holdings at any time. I remember a small, Chinese biodiesel producer that had a burgeoning business, and the stock was going up big time. Then, the local authorities arbitrarily raised the wholesale price of the diesel fuel that went into the biodiesel mixture and the company’s profitable business model was all but destroyed.

So, if you want to be successful in Chinese equity speculation, you’ve got to get in before the investing marketplace (no surprise there) and you’ve got to get out before the investing marketplace. Nobody said making money in these stocks was easy.