Chinese Stocks Gearing Up For Strong Second Half?
The Dynamic Wealth Report
May 16, 2011
by Robert Morris, Editor
This past Friday Chinese stocks posted their biggest one-day gain in
over a month. The Shanghai Composite Index jumped nearly 27 points to
close at 2,871 for a gain of 1%.
The index also notched its first weekly advance in four weeks, rising
0.3%.
Chinese stocks rallied on news showing recent interest rate hikes and
increases to bank reserve requirements are starting to work. A number of
important economic indicators showed last week China's red hot economy
is finally slowing down.
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This was music to investors' ears.
Prior to last week, Chinese stocks had been in freefall. The Shanghai
Index had dropped more than 6% after setting a five-month high on April
18th.
Investors were selling Chinese stocks across the board.
They were concerned about the Chinese economy not slowing down despite
government efforts to reign in surging economic growth. They feared
China's economy was overheating and giving rise to potentially out of
control inflation.
Under that scary scenario, interest rates would have to keep rising with
no end in sight.
The prospect of rising interest rates for months to come had many
worried China was entering a prolonged period of much slower growth. And
some investors were even talking about rising interest rates sending
China into an economic recession.
But new economic data show those fears were overblown.
First off, consumer inflation eased slightly in April to 5.3%. That's
down from a 32-month high in March of 5.4%. Not a huge drop, but it was
better than expected. And the change in direction is a strong signal
inflation may have peaked.
In addition, new data show economic growth is finally slowing. April's
13.4% increase in industrial output was a full percentage point below
expectations and the strong pace in March. Further evidence China's rate
hikes and higher bank reserve requirements are having the desired
slowing effect.
Finally, new data show Chinese consumers are also starting to reign in
rampant spending. Retail sales grew at a slower rate than expected in
April. And the rate of consumer spending growth declined slightly from
March.
Taken together, these indicators paint a much different picture than
what we've been seeing over the past few quarters. They show the Chinese
economy starting to slow down from the previous breakneck pace.
Why is slowing economic growth a good thing for China?
It means the Chinese government may end their interest rate tightening
policy much earlier than previously thought. It also means they may not
have to raise bank reserve requirements any further.
As a result, many Chinese stock market analysts are now humming a much
happier tune.
Jim O'Neill, Chairman of Goldman Sachs Asset Management, says China's
inflation "won't be a problem" in the second half of 2011. And he
followed up that bombshell by saying Chinese stocks may have a "big
rally" as the rate hike cycle ends.
O'Neill's comments echo what I've been saying for months. Back in
February 2011, I wrote an article entitled
Big Bargains In Chinese
Stocks. Here's what I said then:
I think it's much more likely the government's policy of measured
interest rate increases will bring China's high flying economy down for
a soft landing. In other words, I'm expecting a combination of strong
growth and manageable inflation in the second half of 2011.
My view of China's economy has not changed one bit. In fact, I feel even
more strongly China is headed for a soft landing. And I'm convinced
Chinese stocks are setting up for a huge rally in the second half of
this year.
This is one rally you don't want to miss.
The easiest way to play the coming rally in Chinese stocks is with an
exchange traded fund (ETF). The best of the bunch is the iShares FTSE
China 25 Index (FXI). This ETF has plenty of liquidity with net assets
of $8.2 billion and average daily volume of 15.9 million shares.
Take advantage of the ongoing negative sentiment for Chinese stocks. You
have a golden opportunity to establish a position now at cheap prices. By getting in ahead of the crowd, you'll be perfectly set up to rake in
huge profits when Chinese stocks surge later this year.
***Editor's Note*** Just a quick note that
we're just a few days away from the launch of our new currency trading
service, The Forex Blueprint. We've set up an
"information page" that describes exactly how you can take advantage of
all this stuff happening with the US Dollar, Europe and the IMF!
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• Airlines (+10%)
Airline stocks are moving higher in a hurry. Over the past month, the
Dow Jones US Airlines Index has gained 10%, making it the second best
performing industry. Jet fuel prices are dropping sharply as oil prices
retreat. And JP Morgan recently said they expect Wall Street to raise
estimates and price targets for airline stocks across the board. Top
performers over the past month include United Continental Holdings
(UAL), Copa Holdings (CPA), US Airways Group (LCC), and
Alaska Airlines
(ALK).
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