Hurry – Chinese Dip Won't Last Forever

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Photo Credit: BBC

The fear of an economic recession is already priced into the Shanghai index.  After breaching a previous low to hit its lowest point in 2010, the Shanghai index shows it may be pricing in far too much fear and not enough future upside.

Fundamentals are Improving

Despite concerns over a property market that has surged 12% year over year, the main driver of Chinese growth is starting to come back.  In April, Chinese export data showed that exports are increasing at a faster than anticipated rate of 30.5%.  In addition, a new line of credit given to bankrupt nations in Europe ensures that one of its main export markets will be well capitalized enough to continue borrowing its wares.

Relative Value

The last time the Shanghai index traded to its present low was when it moved through the level in early 2007.  Of course, that was before the bubbling indices overseas started to fall and the economy slipped into economic recession.  However, with China being the most resilient to recession, falling only when the economy started taking a toll on China's export economy, improving leading indicators in Europe and North America suggest China could rebound, albeit lagging the rest of the world since inventories are still higher than normal.

Technically, the current market levels also play a role.  The 2660 level was seen as strong support in February 2007, and the index bounced again in July 2008 before falling through a month later and bouncing back through in April 2009.  Afterwards in late August and early September, the index bounced off the level again, suggesting there are plenty of buyers at today's price levels.

Pulling the Trigger

Investors would be well advised to continue building a position in China's largest index, seeing plenty of opportunities for gains and limited downside.  Since China was the last to enter a recession thanks to its reliance on foreign orders, it is only natural that it will be the last to exit recession.  However, with the fundamentals now turning in favor of China's exports, investors have an opportunity to profit heavily on deeply discounted foreign equities.

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