Revolution isn’t good for the stock market.
That premise can be seen in the recent selloff in Chinese stocks, as the benchmark ETF in the region — the iShares China Large-Cap ETF (FXI) — has slid 6.3% over the past five trading sessions. Other major Chinese ETFs also were down, including the SPDR S&P China ETF (GXC), off 4%, the Guggenheim China Technology ETF (CQQQ), similarly down 4.6%, the iShares MSCI China ETF (MCHI), off 4.5%, and the PowerShares Golden Dragon Halter China (PGJ), which sank 3.8%.
Of course, revolution isn’t quite what’s happening in the streets of Hong Kong right now.
In fact, the rather tame protests — over the Chinese government’s move to permit only Beijing-approved candidates to be eligible for election in Hong Kong’s 2017 election for the post of chief executive (think big city US mayor) — have a lot of people voicing their discontent in the streets, but there hasn’t been any actual reports of blood.
Yes, there have been arrests, and according to mainstream media reports, Hong Kong police said Sept. 29 that they had arrested 89 people since protests began. Those arrests include forcible entry, disorderly conduct and obstructing police.
A disruptive force? Yes. Revolutionary? Hardly.
Ironically, the selling in Chinese stocks in reaction to Hong Kong protests can be viewed, in my opinion, as a sort of metaphoric “blood in the streets” buying opportunity.
Most investors are likely familiar with this old adage, which was originally stated by the famed 18th-century British nobleman and Rothschild banking heir Baron Rothschild. Buying when there’s blood in the streets was Rothschild’s formula for investing success, and though I’m no fan of elite British banking cartel members, I am a fan of borrowing this premise to buy quality stocks and ETFs when they’re selling at a discount.
The recent protest-inspired selling in Chinese ETFs such as FXI, GXC, CQQQ, MCHI and PGJ now have given patient investors an attractive entry price by which to make money over the long term, as buying now could allow you to cash in on a China rebound in the months and years to come.
Although the China growth story has been the subject of much criticism and skepticism this year, the fact is that even if China’s economy only achieves a World Bank-lowered 7.6% expansion rate for the year, this growth would still be more than sufficient to avoid any dreaded “hard landing” scenario in the second-largest economy in the world.
Moreover, even if the growth data slides, and especially if other important economic metrics such as the nation’s manufacturing PMI begin to show signs of a slowing, Chinese policymakers aren’t going to sit idly by and do nothing.
The smart money knows that Chinese officials won’t hesitate to inject more monetary stimulus into the economy in order to combat any economic slowing. The big injection of capital from the People’s Bank of China (PBOC) was largely responsible for the Chinese stock boom post-financial crisis. That move saw FXI spike nearly 90% from March 2009 through December 2010. And while that kind of surge isn’t likely again for Chinese ETFs, more stimulus from the PBOC certainly is China equity bullish.
So, if you’re looking for a sector selling at a discount to long-term growth potential, then turn your head to the Far East, and get long Chinese ETFs.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.