Buy Bad News with iShares FTSE China 25 Index Fund (FXI)

Buy when there's blood in the streets

   

The big selloff in equities, bonds, gold and just about everything else has been attributed to the Fed’s “tapering” narrative, and while the latest risk-off trade is mostly due to Mr. Bernanke and crew, there’s another factor a world away that’s also had a big influence on the selling in global markets. This world away is China, and conditions in that market have caused a pernicious pullback that’s caused significant wealth destruction for those long Chinese stocks.

The dual-headed monster of a slowdown in the world’s second-largest economy along with what has been described as a mini-credit crunch is largely responsible for smacking down the iShares FTSE China 25 Index Fund (FXI) more than 15% over the past month. This exchange-traded fund  holds China’s biggest companies, so it came as no real surprise that the recent print on the HSBC flash PMI, which fell to 48.3 in June from 49.2 in May, caused FXI to crumble. This metric shows China’s economy is slowing at a much faster pace than most had expected, and that’s not good for the value of stocks in Shanghai.

As for the mini-credit crunch, this is a new level of uncertainty for stocks in FXI. What’s happened here, basically, is a recent lack of liquidity in the Chinese funding market, i.e. what banks and other financial institutions use for daily liquidity, and this liquidity drain is something the Chinese central bank is purposefully allowing to happen. There’s also been fear raised over China’s so-called shadow banking system, and those fears are adding to the bearish mood in that country’s equity markets.

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So, with all of these negatives weighing down Chinese stocks, logic would tell you to avoid taking a trip to Shanghai. However, the market logic that beckons wise traders to “buy when there’s blood in the streets” is the logic I’m employing here when I say now is the time to dive into the China plunge with FXI.

Sure, trying to catch a falling knife is a dangerous and tricky proposition, and we don’t know how the Chinese mini-credit crunch will play out. What we do know, however, is that Chinese stocks now trade at their lowest point in nearly 10 months. And, now that domestic stocks, bonds and commodities also are struggling, any good news in China could cause a nice trading bounce in this beaten up sector.

If you’re the intrepid, world-traveler type when it comes to your trading portfolio, you may want to book a summer trip to China to mop up a little blood in the streets.

 

At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.


Article printed from InvestorPlace Media, http://investorplace.com/247trader/buy-bad-news-with-ishares-ftse-china-25-index-fund-fxi/.

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