Time to Nibble on China Stocks
China's stock market has fallen on hard times in 2010. The Shanghai index is trading at levels last seen in September of 2009, and year to date is down nearly 20%.
Looking at the three year chart below its clear that stock market deflation has occurred in China – and not just in 2010. Since the beginning of 2008, China stocks are now down a whopping 52%.
Yet there are still people out there saying a massive plunge is in the works for the Chinese stock market.
My question is: to what level? The Shanghai index has now only recovered 50 percent of its value since it bottomed in November of 2008. U.S. indices have fared far better since they bottomed in March of 2009 (recall that China stocks were among the first to stage a comeback).
In comparison, the Dow has now risen by 64 percent, the Standard and Poor 500 by 71 percent, and the Russell 2000 by 103 percent.
The Shanghai index found support at current levels in September and October of 2009 – I think it will again. I know there are property bubble issues in China – and I won't deny that those, along with a myriad of other issues, are keeping a cap on a China stock market rally. As they should, wealth creation through stock ownership is not supposed to be an overnight phenomenon – it takes time.
***But I don't see a full blown stock market plunge in China. As is always the case, certain sectors could be more challenging than others – notably Chinese banks. If property loans do go sour, these institutions will be stuck holding the short end of the stick.
But there are other areas investors should consider, if they want exposure to this market. Agricultural stocks are one – China has a lot of mouths to feed. Energy stocks – China has a lot of people to – ok, you get the idea.
I wouldn't recommend going all in – I never do. As a member of my small cap research team says, 'It's better to nibble than bite'.
Nibbling means averaging into positions, and buying more than one stock. It's still possible that individual China stocks can drop by 20 to 50 percent, or more. But many have already fallen by that much.
I've been nibbling on China stocks for a while now, and I've had big gains. I've taken some lumps as well.
I'm not alone in saying investors should consider adding to positions in China now. As quoted in Bloomberg, strategists at BofA Merrill Lynch Global Research said China's stock markets have 'corrected enough' and that 'the probability of a hard landing is not that high'.
On the other hand, David Roche from Hong Kong-based hedge fund Independent Strategy believes "The economy in China has peaked, unless the economy in the U.S. really gets going and drives exports."
Roche thinks infrastructure building in China faces a chilling future as government lending for these types of projects dries up. Hence his sour view on growth – 90% of which he believes was due to infrastructure spending in 2009.
I think China will continue to grow – not at 11 percent annually, but at a more moderate 5 to 10 percent over the next five years. There will be speed bumps, and stock prices will reflect them. Expect volatility, especially in small cap China stocks.
But I'm still nibbling. To see what on, check out my Small Cap Investor PRO portfolio by clicking here.
**Let's switch gears.
Yesterday gold set another record high. The precious metal jumped $19.50 to settle at $1,220 an ounce. I own a junior gold miner in the Small Cap Investor PRO portfolio. The company expects to pull 70,000 ounces of gold from the hills of Mexico in 2010. And looking at gold prices, that translates to a bundle of cash.
I alerted you to a divergence in the price of this stock and the price of gold last week. You can already see that this company, the solid black line in the chart below, is looking to close that gap. It's got some work to do to catch gold, especially if gold continues to rise.
In the last quarter this company received an average price of $1,119 per ounce, and total cost per ounce was only $425. That's a $694 profit per ounce! That's why I love low cost gold producers, as the price of gold goes up, their margins expand. And the more gold they pull from the ground – well you get the picture.
This stock rose over 5% yesterday, and more gains are likely. It's not too late to pick up shares however. Get my full research report here.
If gold continues to climb, as I think it will, you won't be disappointed.
