China’s 1Q Strength Leaves Everyone in the Dust

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Photo Credit: Xin Hua News

Chinese indexes officially proved to be the best performing indexes in the first three months of the year.  The Shanghai Composite Index soared more than 30%, beating out every other stock market and out-pacing the S&P500 by more than 44%.

Chinese Stocks Will Lead Recovery

As is always the case, the best capitalized and least indebted countries, companies and individuals have the best financial futures.  In this case, China, which leveraged a trillion dollar foreign reserves holdings fund into a gigantic stimulus package that will never need to be repaid, is in a fine position to rebound the most effectively.

The Tailwinds Behind the Sail

It was almost favorable for the Chinese market to have contracted long before the rest of the world’s stock markets.  The beginning of the end for the China bubble was in 2006, long before the other indices were even thinking about tanking.  The Chinese market was set to recover, at least technically, just as the remaining stock markets of the world were ready to drag it lower.  Perhaps the strength of the recovery is due to the extended dip that the Chinese markets experienced before anyone else.

Prime Positioning with ETFs

Luckily for US investors, there are plenty of opportunities to invest in the Chinese stock market.  There are exchange-traded funds for basic indices, as well as managed, low fee funds that provide mutual fund-like investment strategies.  Right now, there isn’t a single index as hot as the Shanghai Composite.  Most Chinese indices are showing negative returns for 2009, losing roughly 1-2% after the first few months.  Even though that is a negative return, it’s still far better than any other market you’ll find around the world.  What is important is not only growing your money, but also protecting it against inflation, as a gain of 10% is nothing should the rest of the world gain 15%.

Some ETF Picks

Morgan Stanley China A Share Fund (CAF) is a closed-end that is designed to track the Shanghai Composite Index.  However, be wary that the fund is closed-end, and the fact that it trades at a hefty premium to the net asset value.  This is one of the biggest risks when buying closed-end exchange-traded funds; you pay a premium that will never be recovered.

iShares FTSE/Xinhua China 25 Index (FXI) is another excellent option; it’s practically the Dow Jones of China, but this year has proved less than profitable with a negative 2%.

Sector Investing

The Chinese banking and steel industries will perform well in the coming months out of the recovery.  Chinese real estate is proving strong, and even with a worldwide weakness and demand for construction, metals are sure to rise with the growing economy.

Luckily for Chinese investors, there is a way to get simultaneous exposure to financials, which are hurting just as painfully as US stocks, and other sectors.  Banking in China is split up in sectors, with some banks issuing small commercial and personal loans, while others specialize in loans for construction and industrial products.  Obviously, the success of each industry plays heavy into the profitability of the bank, and as such, provides different levels of exposure to a multitude of investments.

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