Why I Can’t Get Enough of this Growth Region

by George Leong, B. Comm.

For many of you who read this column, you’d know that I’m a big backer of Chinese stocks. China has been and will continue to be one of the top major growth regions in the world. When you have 1.3 billion people and a middle class of about 300 million, you’ve got potential. In my view, no other country offers such incredible investment opportunities. Also consider that China is a neighbor of the world’s second most populous country, India, where there are also excellent growth opportunities, with over 1.1 billion people and fantastic growth prospects. Imagine the combined markets when the disposable incomes in both countries accelerate upwards. That is why you need to be in China. China and India are trying hard to expand trade, which was a mere $38.7 billion in 2007, but is expected to reach $60.0 billion by 2010 after a bilateral pact has been signed.

The performances of the Chinese and U.S. stock markets this year tell us the story. The DOW is down three percent, while the country’s best performing NASDAQ index is up about 14%. In China, the Shanghai Composite Index (as of June 17) shows the index up a hefty 55% this year and in an upward move after breaking above 2,000. The index is trading above the key short-term and longer-term moving averages. The comparative returns emphasize the importance of diversification outside of domestic markets to try to achieve greater overall portfolio returns.

China continues to be the region for growth opportunities. We are seeing the Chinese economy show signs of recovery due to the massive US$586-billion economic stimulus plan there and the fact that the spending will not hurt the country as far as building debt. With over $2.0 trillion in foreign reserves, China has money to spend. The government there also has total authority.

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As many of you know, we have been firm supporters of Chinese stocks, even during the difficult times in 2008 when selling capitulation towards Chinese stocks was extremely high. And we continue to believe that China will be the place for stellar growth going forward.

The country’s Industrial Production fell in April, but, at 7.3%, it continues to show growth. Consumers are also continuing to spend, with a 14.0% year-over-year increase in the April reading.

Evidence of China’s slowing is reflected in a 22.6% year-over-year decline in the country’s exports in April. China is hoping for recovery throughout 2009. According to the State Information Center, the country’s GDP could rise seven percent in the second quarter, up sequentially from 6.1% in the first quarter. Compare this to the U.S. or other European Union countries and you’ll understand my optimism.

The bottom line is that China remains a key component of the global economic machine, and it will need to stabilize its economy; otherwise the ripple effect to the rest of the world could be devastating.

If you hold Chinese stocks listed on U.S. or Canadian exchanges, the gains have been stellar. The current valuations remain intriguing and the country is still a growth market for many sectors.

At this point, the rally in Chinese stock is in place. I feel that there are still good buying opportunities in Chinese stocks, specifically of the small-cap variety. However, you should be cautious and take a look at buying value at the current price levels. Chinese stocks listed in the U.S. will continue to represent an excellent area for growth investors, yet you also need to be careful and be diversified in your portfolio, since there could be more downside risk.