What You Shouldn’t Be Without as an Investor

by Mitchell Clark, B. Comm.

U.S.-listed Chinese stocks are powering ahead right now and some serious money is still being made in this sector. Even large-cap Chinese stocks are moving decidedly higher and this is well illustrated by my favorite ETF, the iShares FTSE/Xinhua China 25 Index (NYSE/FXI). For a basket of large-cap companies, this fund is making a lot of investors’ wealthy right now.

I still think that U.S.-listed Chinese stocks will lead the global equity markets over the coming quarters, particularly on the upside. While we’re vulnerable to big selloffs because our equity market is still in bear market territory, Chinese stocks already experienced a major correction just before the subprime mortgage crisis. This is why Chinese stocks are so strong right now, because their equity market already had a chance to correct itself. Also, the economy in China is still on a tear and, even if it’s not as strong as the previous few years, it is still growing significantly. In fact, the Chinese economy is now probably growing close to 10% annually if it were to use the same methodology for calculating GDP growth as we do.

As you already know, U.S.-listed Chinese stocks can be very volatile, which makes them very attractive for traders. Also, a lot of these stocks are highly liquid, even if many of these companies are actually considered small-caps. The other important factor with this sector of the market is the tendency for these companies to be highly profitable, much more so than what we’re used to in the domestic marketplace. This is because the cost of labor and raw materials in China is comparatively much lower due to poorer worker standards and significant economies of scale. This unusually high level of profitability helps keep corporate debt at minimal levels and, from what I’ve researched, you end up with a lot of fast-growing
companies that have very healthy balance sheets.

As a stock market speculator, I certainly wouldn’t be without a few U.S.-listed Chinese stocks in my portfolio.

If you don’t like the risk of individual securities, you can certainly own a basket of large-cap stocks like FXI. This index has already run up significantly, but I do think it will keep ticking higher over the coming quarters.

Because the stock market is so forward looking, there is good money to be made at this time if you’re a speculator. The fundamentals for the Main Street economy still have a long way to go, but the near- term trading action in stocks seems to have a decent positive bias. Only time will tell how long it lasts, but there is a hopeful tone to the stock market right now.