Time to Shift Some Capital into China’s Stalling Economy?
While the stock market is running higher and we have seen some outlandish valuations with many of the high-momentum technology stocks, Chinese stocks continue to wallow.
There are critics saying China is primed for a stock market meltdown, but we have yet to witness this despite the stalled growth in the country. And while some argue the country is stalling, you also have to keep in mind that gross domestic product (GDP) growth in the seven-percent range is not that bad.
Many pundits estimate China will expand at around 7.5% this year. Even if the growth was a tad short, it’s still much higher than the rest of the industrial world. Look at the United States; it’s growing at less than three percent, yet the stock market appears to be fine with that.
Famed investor Jim Rogers, who has been a perennial bull on Chinese stocks, continues to believe China is ripe for strong investment growth. I’m also in that camp.
The Chinese government is looking at liberalizing foreign investments and stock ownership in the country, which should help to add buying interest to the country.
China’s stock market indices have vastly underperformed U.S. indices since late 2008, and this continues to be the pattern. The price chart shows the downward trend in the Shanghai Composite Index from 2008 (shown by the red candlesticks) compared to the upward move in the S&P 500 (shown by the dark green line) on the chart below.
My thinking is that it may be time to look at China if you are not already invested there. You just need to be careful and pick selectively.
The growth in China and Asia, in general, is beckoning investors. If you have ever been to China or elsewhere in Asia, the first thing you would notice is the dynamic business climate and staggering growth in the cities and mega-cities, like Hong Kong, Beijing, and Shanghai.
Investing in small Chinese stocks is high-risk and advised only for astute growth investors.
An alternative to buying stocks is to buy exchange-traded funds (ETFs) with a focus on China. On the small-cap end, take a look at an ETF like PowerShares Golden Dragon China (NYSEArca/PGJ). The PGJ is a good fund with above-average price appreciation potential. It also has exposure to many of the growth areas in China, including the technology and healthcare areas.
Now, if you would rather play the large-cap side and Chinese blue chips, a decent ETF that is currently underperforming is the iShares China Large-Cap (NYSEArca/FXI). The FXI holds the top major companies in the country, many of which are not available to buy on U.S. exchanges.
The FXI ETF is based on the Xinhua 25 Index, consisting of 25 of the largest and most liquid Chinese blue chip stocks. The FXI ETF is a relatively conservative play on Chinese stocks. The fund is heavily invested in the financial services (51.5%). Other top sectors include communications (15.4%), energy (12.6%), and technology (8.2%).
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