— by Mitchell Clark, B. Comm.
It’s actually a difficult time to be a buyer of equities in this market, because prices have moved so far, so quickly. I have to admit that I continue to be astounded at the price performance of the broader market since March. There really was a lot of money sitting on the sidelines waiting to be put to work.
I still contend that one of the strongest international equity markets will be China’s going forward. Already, that stock market has run a tremendous amount and, because that market was in correction before the global financial crisis took hold, it is well positioned for another major uptrend. This is already evidenced by the substantial capital gains currently being achieved in U.S.-listed Chinese stocks and by the benchmark indices representing the broader market.
Regular readers of this column will remember my affinity for the
iShares FTSE/Xinhua China 25 Index (NYSE/FXI), which is up an enormous amount for a large-cap stock index. This basket of stocks is comprised of the 25 most liquid Chinese companies that are available to international investors and trade on the Hong Kong Stock Exchange. This index is up over 65% since March and I think it will continue to be one of the strongest in the global equity landscape over the next two years.
Domestically, the stock market looks vulnerable to a pullback, and it isn’t that it’s not well-deserved. I don’t think now is a good time to be considering new positions. As I said, the market’s come so far so fast that it’s now due for a rest. If we get a period of consolidation over the near term and there aren’t any new shocks to the system, I’d go long on stocks in a big way.
A number of times in this column, I’ve written about the kind of model equity portfolio that I think will outperform over the coming quarters. I’m sticking to my guns in this department and my investment themes include: agriculture; Chinese equities; a little pharma; Canadian banks; and gold. For domestic large-cap stocks, they have to pay a dividend (resource excepted). For Chinese stocks, I’ve already recommended the large-cap index. Finally, there’s always room for a few great special situation opportunities. In the past, I speculated that owning a power plant builder in China might make for a good investment.
One thing I’m noticing now is that there is a lot more chatter among Street types about government spending and the potential for inflation down the road. In fact, I’m starting to hear traders talking about the potential for hyperinflation. Usually, however, when there is broad consensus among Street types, the situation doesn’t play out quite as they expected. Still, all this spending with borrowed money has got to eventually make the interest rate cycle turn around. The cost of money can’t get any cheaper than it is now, so it only has one direction in which to turn. And, it’s going to do so commensurate with prices for most raw materials.
The only good news about the inflation story is that it should make real property ownership more rewarding. My view is that personal and government debt will become the single greatest threat facing the economy over the next decade.