Is it time to invest in China stocks?

The Dynamic Wealth Report
January 30, 2008

Can 1.8 Billion People Be Wrong?

Ten years ago the British handed control of Hong Kong back to the Chinese. This was the start of massive changes to that economy. State controlled companies were placed in private hands and small business started to blossom. The Chinese economy started looking more and more like a free market.

The result was incredible growth.

China has more than 1.8 billion citizens and as their economy develops, the middle class grows. Now the GDP of China is expected to increase more than 10% every year. This economic growth is so exciting that Jim Rogers, one of the best money managers of our time, uprooted his entire family and moved to Asia. When asked why, he said "I do not want to sell Chinese stocks. I want to own them forever and I want my [four year-old] daughter to own them."

Now that’s what I call a long term investment strategy.

Over the last few years, investors have made tons of money in the Chinese markets. If you had bought iShares FTSE/Xinhua China 25 Index ETF (FXI) at the start of 2005 you would have made more than 315% on your money by October 2007.

However the excitement in the Chinese markets got a little out of hand last year. As a matter of fact, in May I warned of a near term bubble. As it turns out I was right . . . but a little early on my call.

As you can see from this chart the index started falling in October of 2007. Over the last few months, it has fallen almost 33%.

China Stock Market

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Currently, China is emerging from an economic slumber. Politically, they’re a communist country. Economically, they’re waking up to a free market revolution. I remember the influence China had when I was working in Singapore. It included language, social customs, food, and even economics. Now they’re influential the world over.

In the short term, the outlook appears uncertain. Some economists believe the economic slowdown in the United States could spread to emerging markets. In that scenario, the Shanghai market might fall further. Some advisors have gone as far as suggesting that we avoid the Chinese markets entirely.

I think they are horribly wrong and a bit shortsighted.

Unless you’re focused on very short term trading, now is the time to go long China. The country is in the early stages of a multi-decade economic expansion. Their economic growth is second-to-none, and their infrastructure is still in the early stages of build out.

Don’t let the recent market correction scare you away. Think of it as a great way to expand your emerging market exposure at a 30% discount. A good way to get broad exposure to the Chinese market is through the iSharesFTSE/Xinhua China 25 Index ETF (FXI).

• Gold ($925 per oz)

Gold reached new highs this week on continued concerns over a potential US recession. Traders also moved towards gold as a hedge to inflation after the Federal Reserve cut interest rates.

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Issue Date:
Wednesday, January 30, 2008

• Barrick Gold (ABX) hit a new 52 week high of over $53. Clearly the company is benefiting from new highs in gold.

• CVR Energy (CVI) hit a new high of just under $27. The company went public in October of last year at $19 per share. CVI is an independent refiner of transportation fuels.

• IKON (IKN) hit a new low of just over $8. The company recently announced guidance for second quarter 2008 below analyst estimates.

"If a good company's stock is out of favor, it will eventually come back."
- Wall Street Saying

Sector		Gain
Application Software		58%
Residential Construction		37%
Home Improvement		28%
Gold		26%
Mid-Atlantic Banks		24%

*Last 30 days

Sector		Loss
Copper		49%
Technical Services		45%
Recreational Vehicles		40%
Industrial Elec. Equip.		36%
Metal Fabrication		36%

*Last 30 days

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