4 Chinese Plays to Make After the Dip

by Jim Woods | July 30, 2013 9:57 am

4 Chinese Plays to Make After the Dip

In late June, I told 24/7 Trader readers that they should buy into the bad news swirling around China[1].

At that time, Chinese stocks were facing what I called the dual-headed monster of a slowdown in the world’s second-largest economy along with what some were calling a liquidity crunch due to fear over an unstable “shadow” banking system[2].

Since the June 21 publication of that article, the value of the iShares FTSE China 25 Index Fund (FXI[3]) has surged more than 6%. One reason is that traders all saw compelling value in Chinese stocks after they plummeted to new 52-week lows in June.

The trading bounce in Chinese equities brought FXI, which holds many of the biggest and best stocks traded on the Shanghai Exchange, back above its short-term, 50-day moving average — a bullish sign for the continuation of the recent uptrend.

China Graph 4 Chinese Plays to Make After the Dip[4]

Of course, the technical bounce alone isn’t reason enough to look at Chinese stocks with a bullish eye. Perhaps a more important driver for the sector going forward is the recent proclamation by Chinese officials indicating they will aggressively defend and promote policies that buttress economic growth.

Last week, Chinese Premier Li Keqiang said that sub-7% annual GDP growth would not be tolerated. Policymakers even announced what is being called a “mini-stimulus” package, which is a series of measures designed to help boost GDP. Among the steps taken were the elimination of taxes for small firms (an idea we could certainly benefit from here at home), a push to encourage banks to lend to export-oriented firms and a move to expand funding channels for railway investment.

Now, what most of us really want to see in terms of monetary stimulus from Chinese policymakers is another cut in bank reserve ratio requirements. That hasn’t happened yet, but when it does, we are likely to see another big leg higher in Chinese equities.

For investors, that means there still is time to get in on Chinese stocks at attractive prices. The obvious choice to gain exposure to the biggest stocks in Chinese is the FXI, a fund that holds 25 of the most heavily traded and largest-market-cap stocks in China. Think of FXI as China’s Dow Jones Industrial Average. Yet like investing here at home, bigger isn’t necessarily better.

For those who like smaller stocks, another great China ETF is the Guggenheim China Small Cap ETF (HAO[5]). This fund is broad-based, with exposure to many different sectors such as basic materials, technology and industrials. Yet the fund only holds the more volatile and faster-moving small-cap stocks.

China Graph 2 4 Chinese Plays to Make After the Dip[6]

The chart here of HAO shows that the fund now trades just below its 50- and 200-day moving averages, a healthy move higher from the sharp May-June decline. Here again, we have a value play in place, as you can get this fund for well below its 52-week high of nearly $26.

If it’s individual Chinese stocks you’re looking to build a position in, then there are several outstanding candidates. One I particularly like is Baidu (BIDU[7]). This company operates China’s largest search engine site, which is why it’s nicknamed “China’s Google (GOOG[8]).”

Baidu recently reported second-quarter earnings results that easily bested Wall Street estimates. The company also said it was actively looking for more companies to purchase in addition to the announced $1.9 billion deal to buy app store 91 Wireless earlier this month. That move is designed to expand its share of the huge Chinese mobile internet market.

Another excellent China play is Sina (SINA[9]), which has been called China’s version of social media site Twitter. The company bested fiscal Q1 earnings expectations in May with a smaller-than-expected loss on improved revenue. It also got a boost recently from Facebook’s (FB[10]) better-than-expected numbers, as the FB data showed the growth of mobile advertising revenue.

So, whether its individual Chinese stocks such as BIDU or SINA, or whether you prefer ETFs such as FXI or HAO, now is the time to scoop up stocks in the sector while they remain at bargain prices.

As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.

Endnotes:
  1. buy into the bad news swirling around China: http://investorplace.com/247trader/buy-bad-news-with-ishares-ftse-china-25-index-fund-fxi
  2. fear over an unstable “shadow” banking system: http://www.telegraph.co.uk/finance/china-business/10123507/Fitch-says-China-credit-bubble-unprecedented-in-modern-world-history.html
  3. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI
  4. [Image]: http://investorplace.com/wp-content/uploads/2013/07/China-Graph.png
  5. HAO: http://studio-5.financialcontent.com/investplace/quote?Symbol=HAO
  6. [Image]: http://investorplace.com/wp-content/uploads/2013/07/China-Graph-2.png
  7. BIDU: http://studio-5.financialcontent.com/investplace/quote?Symbol=BIDU
  8. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  9. SINA: http://studio-5.financialcontent.com/investplace/quote?Symbol=SINA
  10. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB

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