Avoiding emerging markets generally, and China specifically, has been one of my more prescient market calls this year. I never believed in the hard landing scenario proffered by uber bear, Jim Chanos, for two seconds, betting instead that the Middle Kingdom would settle down to a more sedentary 6-7% GDP growth rate. Once a new government was installed in Beijing, the uptrend would resume.
My expectation was the new leadership, the first in ten years, would seek to ingratiate themselves with the masses by launching a series of new programs to stimulate the economy. After all, they don’t have direct elections in China. These should feed into more positive economic reports in the coming year.
It now looks like that is exactly what we are getting. The last two months have seen an undeniable improvement in the data flow. There has been a dramatic ramp up in retail sales and industrial production. The private sector Purchasing Manager’s Index has delivered three consecutive months of upticks. Oil and electricity demand have seen a sudden increase. Long dormant real estate is finally starting to catch a bid.
For the global investor, the implications of a China recovery are huge. For a start, you want to run out and buy every other quality emerging market out there, including Hong Kong (EWH), Taiwan (EWT), South Korea (EWY), Chile (EWC), Turkey (TUR), and Indonesia (IDX). Base metals do very well in these conditions, especially copper (CU), and producing companies like Freeport McMoRan (FCX) (click here for “Time to Get Back Into Copper?”) . A reviving dragon will also create a nice push up for oil prices, which may explain its failure to break down over the past month.
The rebirth of China also solves the mystery of why the Australian dollar has been so strong. In the tumultuous October selloff you would have expected the currency down under to nosedive as well. It rose instead. In now looks like Ausie will trade tick-for-tick with the Chinese economy and tell the rest of the world to sod off. If there was any further proof needed that the land of Fosters, Penfolds, and Yalumba was a Chinese colony, this is it. Nationalists take note.
The stock markets have already sniffed as much. The Shanghai market just put in its best week in years, soaring some 5%. Hong Kong has been well ahead of the game, living in a bull market since June. You can also see this in the Chinese renminbi (CYB), which has been pushing through to new all time highs almost every day (click here for “Chinese Yuan Hits 20 Year High”).
Be careful not to rush out and buy the same Chinese names that did well in the last China boom, the big exports. The new plays will be centered around companies targeting domestic consumption, seeking to profit from the growth of the Chinese middle class. I’ll get you the specific names and ticker symbols, once I have completed my research there. China has not exactly been at the top of my research pecking order until recently.
The return of the China trade does not look like a sure thing, yet. Much of the improvement relies on stepped up government spending. China’s biggest customer, Europe, is still on life support. An American recession would certainly pee on their parade. But watch the data releases. This could be the big trade of 2013.
Is China Ready to Leap Ahead?