Chinese Stocks To "Go Crazy" In Second Half
Of 2011
The Dynamic Wealth Report
June 6, 2011
by Robert Morris, Editor
It's been a tough year so far for Chinese stocks. But a bright light is
starting to appear at the end of the tunnel. We got two pieces of good
news over the last couple of weeks which suggest the cloud over Chinese
stocks may soon lift.
First off, new economic data shows China is getting inflation under
control.
In April, consumer inflation eased slightly to 5.3%. That's down from a
32-month high of 5.4% in March. Not a huge drop, but it was better than
economists were expecting.
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More importantly, the change in direction is a strong signal
inflation may have peaked.
And that would be great news for Chinese stocks.
For months now, investors have been exiting Chinese stocks like
passengers on the Titanic. The only difference between the two is the
Titanic had a band playing while the ship went down.
Most of these investors are worried the Chinese government's policies
for busting inflation are failing. And they're selling Chinese stocks
because they're afraid interest rates must go higher in the months
ahead.
You see, stocks tend not to perform well in a rising interest rate
environment. Investors often shun stocks due to fears the rate hikes
will go too far and squelch economic expansion. Or even worse... send
the economy into a recession.
But if inflation has peaked in China, we should see interest rates start
to stabilize in short order. And if consumer prices continue declining,
we might even see interest rate cuts later this year.
In either case, the end result would be the same...
A new bull market in Chinese stocks!
You see, the recent correction has left a great number of fast growing
Chinese stocks trading at bargain basement prices. And with clear skies
ahead, savvy investors are likely to pounce on these unloved, profit
making machines.
But don't just take my word for it...
Jim O'Neill, chairman of Goldman Sachs Asset Management, recently
provided his own bullish outlook for Chinese stocks. In a recent
interview with Bloomberg TV, O'Neill said China's inflation is close to
easing.
More importantly, he predicted Chinese stocks may "go crazy" in the
second half of the year.
And O'Neill knows a thing or two about emerging markets. You might
recall he coined the term "BRIC" which refers to the top emerging
markets of Brazil, Russia, India, and China. The term is now universally
used throughout the investment world.
But that's only part of the story...
Bloomberg also reports Goldman Sachs is setting up a yuan-denominated
private equity fund in China. The fund will be used to invest in a
number of Chinese companies. Clearly, Goldman sees big opportunities in
Chinese stocks.
Speaking of private equity funds...
Morgan Stanley Private Equity Asia (MSPE) made a move in China last week
that shocked the investment world. They announced a $50 million
investment in Yongye International (YONG). What's so shocking about a
private equity fund investing in a company?
You may have heard about the wave of short seller attacks against small
Chinese companies with tiny floats. One of the short sellers favorite
targets has been Yongye International. The company has been under fire
for most of this year.
As a result, the shares are down more than 42% year to date!
Here's the kicker...
Despite allegations of fraud, MSPE has stepped up and purchased 25% of
the company. This is a very strong signal the crisis of confidence in
Chinese reverse-merger stocks may be coming to an end. And if so,
another heavy burden will be removed from the backs of Chinese stocks.
Now's the time to start putting together your buy list for small-cap
Chinese stocks. With the interest rate hike cycle and reverse-merger
short attacks coming to an end, it's only a matter of time before these
high-octane growth stocks take off.
• Business Training & Employment Agencies (-11%)
Shares of companies in the Business Training & Employment Agencies
industry have been taking it on the chin over the past month. Recent
data show the pace of the US economic recovery is starting to slow. And then topping it off last week, the economy added shockingly fewer
jobs than expected while the unemployment rate inched higher to 9.1%.
Stocks leading the industry lower include Manpower Group (MAN),
Robert
Half International (RHI), and Monster Worldwide (MWW).
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