Why Chinese Equities Are Looking Good

by Mitchell Clark, B. Comm.

When I first started writing about investing in a basket of Chinese stocks as part of a portfolio for outperformance, I never anticipated just how quickly the turnaround would be. I’ve written a number of times in this column that investors might want to consider a basket of large-cap Chinese stocks, in the form of iShares for example, as part of a balanced portfolio. Since the beginning of March, the iShares FTSE/Xinhua China 25 Index (NYSE/FXI) is up almost 10 points and looks to have continued momentum over the near term.

There are some data coming out of China suggesting that the economy is picking up, but it’s really too early yet to get a full handle on the situation. Government stimulus spending takes a long time to work its way through the economy, so there’s no way to identify any clear trends. Still, as I wrote previously, the Chinese equity market will be trading ahead of the economy and this is evidenced by the substantial appreciation of domestic Chinese equities in recent weeks.

Also, for the first time that I can remember, Chinese equities are moving in concert with U.S. equities. For many years, most Asian stock markets danced to their own tunes, reflecting the unique circumstances in each individual country. After the subprime mortgage meltdown, followed by the credit crunch and recession, the world’s largest equity markets seem to be much more correlated in their daily trading action — and China is no exception.

I think that domestic Chinese equities are in for a sustainable period of choppy but rising prices. Even U.S.-listed Chinese stocks are moving up in price now and trading volumes are also going up. This is a sure sign to me that Chinese equities will continue to do well over the coming quarters, in anticipation of improving GDP growth.

Some of the recent economic data coming from China’s multitude of reporting agencies has suggested that imports of oil, iron ore, and other raw materials rose in March. According to my research, imports of iron ore into China rose over 46% in March (as compared to March 2008) and imports of coal grew 37%. Also contributing to what looks like an increase in consumer sentiment, home and automobile sales were up in China. Home sales rose some 23% in the first quarter of the year (as compared to the same quarter in the previous year) and auto sales rose to a monthly high of 1.1 million units.

So, there seems to be some evidence that things are looking up in the world’s largest developing economy and that’s good news for us. This week is an important one, because we’re at the beginning of first-quarter earnings season and earnings reports from financial institutions will be key to the stock market’s trading action. Also this week, China reports its first-quarter growth figures and this will no doubt be an important number for traders.