Contrary on China? Ride the Momentum on FXI

China's problems haven't gone away, but the money is flowing back to Chinese stocks

   

I’ve always been a skeptic when it comes to the “next big thing” conventional view of the markets. Interestingly, one of the more recent forms of conventional wisdom out there is the preponderance of China haters. There are many of doom-and-gloom merchants out there telling us that the Chinese economy is a mess, and that China is a house of cards, and that you can never trust China’s data, etc.

Now, I do think there are plenty of real problems when it comes to China. Chief among them is an overbuilt housing market and the potential for pernicious food inflation that could result—as it has in the past—in social unrest.

However, the latest economic data from this giant emerging market economy is very positive, and after a year where it’s been fashionable to be a hater, I am really beginning to favor the contrarian, bullish position on China—and I’m not the only one.

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The chart here of the iShares FTSE China 25 Index (NYSE:FXI), which holds the largest bellwether stocks traded on the Shanghai Exchange, really shows the buying going on the space. In fact, since the fund broke above its 200-day moving average in October, FXI is up nearly 10%. That’s a nice gain, and it shows that the smart money is betting on a new China bull.

Why are we seeing money come back into Chinese stocks? Well, after a protracted decrease in the rate of GDP growth over the past year, the country’s economy is starting to stabilize. Second, manufacturing is picking up again in China, as evidenced by the latest HSBC flash manufacturing PMI data, which came in at 50.9, a number that indicates clear expansion. Finally, there is optimism that new political leadership is preparing a plan to enhance the country’s economic growth in 2013.

I think all of these reasons are likely true, but the real reason to jump back into Chinese stocks now is because of the continued momentum in the space.

Recommendation: I think smart traders can get in on FXI here at the current market price of $39.27, and ride the momentum up toward the two-year high mark of about $46. That would represent an approximate 17% gain in the fund, a move that I suspect could take place over the next six months.

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


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