{"id":26888,"date":"2012-01-26T11:25:19","date_gmt":"2012-01-26T16:25:19","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/01\/26\/investing-in-chinese-stocks-capture-growth-and-manage-risk\/"},"modified":"2012-01-26T11:25:19","modified_gmt":"2012-01-26T16:25:19","slug":"investing-in-chinese-stocks-capture-growth-and-manage-risk","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/01\/26\/investing-in-chinese-stocks-capture-growth-and-manage-risk\/","title":{"rendered":"Investing in Chinese Stocks: Capture Growth and Manage Risk"},"content":{"rendered":"

Investing in Chinese Stocks: Capture Growth and<\/em> Manage Risk<\/a><\/h1>\n

by Carl Delfeld<\/a>, Investment U<\/em> Senior Analyst
\nThursday, January 26, 2012: Issue #1694<\/p>\n

Soon I\u2019ll be publishing a new book and releasing a special report with sharply different messages.<\/p>\n

New World, New Boom: Capture Growth Like the New Tycoons <\/em>is a very blue-ocean optimistic book. It\u2019s chock full of strategies and ideas to help investors grow wealthy with emerging and frontier markets.<\/p>\n

The special report aimed at institutional investors, How Seven Trends Could Break China,<\/em> challenges the conventional wisdom that China is an economic juggernaut and a one-way bet for investors. Its basic premise is that China\u2019s economic and political system isn\u2019t sustainable and will end badly.<\/p>\n

Am I crazy bipolar or what?<\/p>\n

Let me explain.<\/p>\n

China\u2019s Strategy Has Run its Course<\/strong><\/p>\n

You would be hard pressed to find someone more enthusiastic about emerging markets than I am. During the past 30 years, their progress has been remarkable, as market reforms and breakthroughs in technology and communications pulled hundreds of millions of people out of poverty.<\/p>\n

The world filled in, and in my view, we\u2019re just getting started.<\/p>\n

China, in particular, is a remarkable growth story. China now exports more in one day than it did in the entire year of 1978, just before it opened up to the world. In 1990, its economy was the same size of Taiwan; now it\u2019s more than 10 times larger.<\/p>\n

But in my personal view, the strategy that fueled China\u2019s success has largely run its course. More importantly, its political and economic system isn\u2019t flexible enough to adjust to the serious challenges that confront it.<\/p>\n

Here\u2019s how Minxin Pei puts it in this week\u2019s Financial Times<\/em>:<\/p>\n

\u201cAs China marks the 20th anniversary of Deng\u2019s history-changing tour, the most ironic fact \u2013 and perhaps China\u2019s worst-kept secret \u2013 is that pro-market economic reform in China has been dead for some time.\u201d<\/em><\/p>\n

So if you carry my thinking to its logical conclusion, the biggest threat to my optimistic view for robust Asian growth isn\u2019t the euro debt crisis<\/a> or America\u2019s out of control debt and spending.<\/p>\n

It\u2019s China.<\/p>\n

If this is unthinkable to you, I have a question: Did you expect unbeatable Japan to stagnate for two decades after its property and banking crisis or the sudden collapse of the Soviet Union?<\/p>\n

Not So Fast, Though<\/strong><\/p>\n

But even if I\u2019m right about this risk, I strongly recommend that you not go out and sell all your China stocks for a number of reasons.<\/p>\n

First, the direction and\/or pace of the seven negative trends in my report aren\u2019t set in stone. While I\u2019m skeptical that \u201cmoneybags communism\u201d can endure, the government has tools at hand to kick the can down the road, and they\u2019ll certainly try to do just that as long as possible.<\/p>\n

Second, Chinese stock markets<\/a> are usually driven by liquidity and momentum rather than fundamentals. There were many years during the 1990s when the Chinese economy was growing at 10%-plus rates and the stock markets did nothing.<\/p>\n

Take a look at iShares FTSE China 25 Index Fund<\/strong> (NYSE: FXI<\/a>), the ETF basket containing China\u2019s largest 25 companies. While China\u2019s GDP growth is consistently growing at 10%-plus pace, FXI\u2019s performance is on a rollercoaster.<\/p>\n

\"Investing<\/p>\n

A buy and hold strategy for China has been, well, disappointing.<\/p>\n

As 2012 markets opened, the Shanghai market is coming off a two-year period of weakness \u2013 down 37%. Therefore, many stocks, and especially the banks, are trading at attractive valuations. This is why I wrote several times in the past few months that China stocks look dirt cheap.<\/p>\n

This doesn\u2019t mean the market will go up, but it does make it more likely. And so far in 2012, FXI is showing an upward trend.<\/p>\n

On the liquidity issue, some of the domino trends might boost the market in the short term. As Chinese property markets slide, investors may very well move this wall of liquidity to stock markets. After all, what other choices do they have?<\/p>\n

The state banking system set interest rates so low that they\u2019re negative after adjusting for inflation. No wonder the Chinese who are able are moving capital offshore.<\/p>\n

The One Simple Step<\/strong><\/p>\n

But there are simple steps you can take to limit or hedge Chinese risk. And the most important is to put in place a 15% to 20% trailing stop<\/a> when investing in FXI, or any Chinese stock<\/a> for that matter.<\/p>\n

By doing this, you can capture any momentum in the Chinese market, but you\u2019ll also protect yourself against the risks of continued market weakness.<\/p>\n

So keep investing in emerging markets and Chinese growth<\/a>, just be careful to manage the risks.<\/p>\n

Good Investing,<\/p>\n

Carl Delfeld<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Investing in Chinese Stocks: Capture Growth and Manage Risk by Carl Delfeld, Investment U Senior Analyst Thursday, January 26, 2012: Issue #1694 Soon I\u2019ll be publishing a new book and releasing a special report with sharply different messages. New World, New Boom: Capture Growth Like the New Tycoons is a very blue-ocean optimistic book. It\u2019s … <\/p>\n

Continue reading “Investing in Chinese Stocks: Capture Growth and Manage Risk”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-26888","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/26888","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=26888"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/26888\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=26888"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=26888"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=26888"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}