Last week, the People’s bank of China surprised market participants by lowering China interest rates. The move by the Chinese central bank was the first reduction in rates in two years, and it appears that China shifted its focus from fiscal prudence to a broad based stimulus program geared to improving growth and energizing bank lending.
The growth in China’s gross domestic product, recently dropped to 7.3% in the third quarter and policymakers are now focused on preventing a drop in growth below 7%. China is one the world’s largest importer of materials, and the move to the broad-based stimulus program by the Chinese central bank could give a boost to the material sector.
China is one of the largest consumers of commodities in the world. The country’s robust demand for these products will likely be strengthened by declining rates. The biggest demand is for crude oil, which incorporates 12% of total imports, followed by iron ore which makes up 5%, and then copper, aluminum and soybeans.
The central bank seems to be focusing on energizing lending, as shown by the irregular cut in China interest rates. The central bank reduced interest rates on one-year lending by 40 basis points and the one-year deposit rate by 25 basis points.
Here’s a look at three of the best ways to play lower China interest rates.
iShares S&P Global Materials Sector Index Fund (MXI)
One of the likely beneficiaries of the cut in China interest rates is the iShares S&P Global Materials Sector index fund (MXI). This ETF holds the global material and commodity oriented stocks such as BHP Billiton Limited (BHP) whose business focuses on materials.
The MXI is down nearly 5% year-to-date. But that performance should turn around in a hurry. Why? Well, the last time the PBOC raised China interest rates, it kicked off a 17% run in the MXI over the next two years. While that past performance doesn’t guarantee future gains, it does provide a good precedent for the ETF.
And history isn’t the only thing supporting MXI right now. The ETF’s 10-day moving average recently crossed above the 40-day moving average, indicating a short-term uptrend that should continue thanks to lower China interest rates.
Market Vectors Steel ETF (SLX)
A second ETF that is likely to experience gains in the wake of the recent reduction in China interest rates is the Market Vectors Steel (SLX) ETF.
The SLX is geared to replicate the price performance of the NYSE Arca Steel Index. It holds steel stocks such as Nucor Corporation (NUE) and the United States Steel Corporation (X) which are likely to benefit from increasing demand for iron ore.
SLX is lower by 17.4% year to date, but momentum is gaining traction. Much like MXI, this ETF rallied 19% when the PBOC last cut rates. Also like MXI, the technicals are supporting SLX at the moment, which will hopefully stop the ETF’s bleeding.
Guggenheim Shipping ETF (SEA)
A third ETF that should benefit from lower Chinese rates is the Guggenheim Shipping ETF (SEA). This ETF seeks to replicate the price performance of the Delta Global Shipping index.
SEA rallied more than 40% over the two years after the PBOC last cut interest rates. Lower rates should increase the demand for imported materials, which in turn should buoy companies that ship materials.
The ETF price is down 9% year to date, but prices have recently rallied from an oversold condition. The commodity channel index (CCI) is printing a reading of -18, but was printing a reading below -100 before the cut in China interest rates, reflecting an oversold condition.
As of this writing, David Becker did not hold a position in any of the aforementioned securities.
