Time to Bet on a China Comeback

by Jim Woods | October 25, 2012 12:13 pm

The domestic equity markets are suffering from downbeat earnings, as some of the biggest industrial giants have either missed on the top line, the bottom line — or both. Many also have warned that they’re expecting slower growth and lower profits for the full year.

Exalted corporate giants such as 3M (NYSE:MMM[1]), Caterpillar (NYSE:CAT[2]), DuPont (NYSE:DD[3]), General Electric (NYSE:GE[4]), Google (NASDAQ:GOOG[5]), McDonald’s (NYSE:MCD[6]), United Technologies (NYSE:UTX[7]), United Parcel Service (NYSE:UPS[8]) and United Technologies (NYSE:UTX[7]) all have disappointed over the past week or so, and that’s left investors seeking greener pastures outside of the domestic indices.

Fortunately, those greener pastures can be found a world away — in China.

On Wednesday, we received a positive print on China’s manufacturing via the all-important HSBC Flash PMI number. The bank’s closely followed China metric rose to 49.1 in October from 47.9 in September. That jump is encouraging because it stanches the slide in this measure that we’ve seen throughout most of the year. And though the number remains below the key 50 mark, a level that demarcates manufacturing growth, the tide is definitely positive with the latest flash PMI.

This data, coupled with official word from China’s Ministry of Industry & Information Technology, which said the nation’s factory output should grow faster in the final quarter than it did during Q3, have lifted hopes that China can avoid the so-called “hard landing” that many bearish pundits have been predicting.

Investors who’ve bet on the hard-landing thesis by shorting stocks pegged to the fate of the world’s second-largest economy haven’t fared very well of late. In fact, they’ve been smacked down hard by a fire-breathing China dragon, especially in recent weeks.

For example, shares of China’s benchmark exchange-traded fund (ETF), the iShares FTSE China Xinhua 25 (NYSEARCA:FXI[9]) have surged nearly 15% over the past three months. And over the past four weeks, they’ve climbed near 10%. The chart here of FXI clearly shows the bullish momentum in the sector since the fund fell to its most recent low in May.


If you were short FXI from March to June, or during August, then you likely made some good money. However, if you didn’t exit your short before September, you likely still are suffering the wrath of the recent China comeback.

Now, while FXI is one of the most widely held China ETFs, it’s by no means the only way to play the country’s rebound. Many other targeted China funds have also enjoyed strong gains of late. One of my favorites is the Global X China Consumer ETF (NYSE:CHIQ[11]). This fund holds China-based companies that provide a variety of goods and services to Chinese citizens, including companies in the auto, healthcare, food and even jewelry sectors.

Like FXI, CHIQ has enjoyed a big run higher of late. Over the past three months, it has spiked nearly 20%, and over the past four weeks the shares have jumped over 8%. That bullish trend is likely to continue, as CHIQ recently broke above key technical resistance at the 200-day moving average.

The price action in both FXI and CHIQ tells me that the smart money now has essentially called a bottom in China stocks.

Yes, lots of bearish headlines on China remain, including the marked slowdown in its GDP growth rate. Political headwinds are still in place with the pending change of leadership. There’s also the issue of whether we can trust China’s official economic data. Despite these negatives, investors continue moving money into China.

That’s the best endorsement I know of for a market segment — and that’s the best reason to bet on a China comeback.

At the time of publication, Jim Woods held no positions in any of the stocks mentioned here.

  1. MMM: http://studio-5.financialcontent.com/investplace/quote?Symbol=MMM
  2. CAT: http://studio-5.financialcontent.com/investplace/quote?Symbol=CAT
  3. DD: http://studio-5.financialcontent.com/investplace/quote?Symbol=DD
  4. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  5. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  6. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  7. UTX: http://studio-5.financialcontent.com/investplace/quote?Symbol=UTX
  8. UPS: http://studio-5.financialcontent.com/investplace/quote?Symbol=UPS
  9. FXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=FXI
  10. [Image]: https://investorplace.com/wp-content/uploads/2012/10/Woods-FXI-10-25.png
  11. CHIQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHIQ

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