China in a Holding Pattern, but There Are Opportunities Inside the Great Wall

China in a Holding Pattern, but There Are Opportunities Inside the Great Wall image China in a holding PatternChina in a Holding Pattern, but There Are Opportunities Inside the Great WallChinese stocks are continuing to underperform the U.S. market this year, and the Chinese economy appears to be headed for its fourth straight year of underperformance.

After recording stellar gross domestic product (GDP) growth of 10.4% in 2010, the Chinese economy has stalled and reversed course, declining in 2011 and 2012.

And it looks like the Chinese economy will continue to be flat in 2013, with estimated GDP growth of 7.8%, according to JPMorgan, which cut its estimate from the previous 8.2%. (Source: Kumar, P., “JPMorgan cuts China 2013 GDP view to 7.8%,” MarketWatch, April 15, 2013.)

China in a Holding Pattern, but There Are Opportunities Inside the Great Wall image china gdp growth 2008 2009China in a Holding Pattern, but There Are Opportunities Inside the Great Wall

Chart copyright © Lombardi Publishing Corporation, 2013;
Data source: National Bureau of Statistics, China

The reality is that China has stalled and at this point, the U.S. stocks look better overall. (Read “‘Year of the Snake’ Favors U.S. Over Chinese Stocks.”)

But the new leaders are ambitious and are aggressively using monetary and fiscal policy to prime the economic pump and keep China from stalling.

It will not be easy, but with over $3.0 trillion in foreign reserves, the country does have more financial firepower than many other industrialized countries that are in a similar situation.

And how may you ignore the estimated 7.8% GDP growth rate?

It’s actually not that bad; it still indicates a country that is expanding rapidly.

While many are avoiding China, highly respected market analyst Dennis Gartman is not one of them; he believes there are opportunities within Chinese stocks.

“If I could do it one way or the other, I’d buy Chinese equities,” commented Gartman. (Source: “I’d Buy Chinese Stocks’: Gartman,” CNBC, April 24, 2013.)

The benchmark Shanghai Composite Index (SSEC) was down 3.1% this year as of Thursday.

The chart below shows the relative comparison between the SSEC and the S&P 500, represented by the green line. The Chinese index has been in a downtrend since February, while the S&P 500 has moved higher, based on my technical analysis.

China in a Holding Pattern, but There Are Opportunities Inside the Great Wall image SSEC shanghai stock exchange composite indexChina in a Holding Pattern, but There Are Opportunities Inside the Great Wall

Chart courtesy of www.StockCharts.com

While the upside appears to be better with U.S. stocks at this time, I would begin to look at China for aggressive opportunities when the buying interest is low.

Along with the added risk of Chinese stocks comes the potential of higher returns. You just need to be careful with stock selection, and make sure your portfolio holdings are well diversified.

Famed investor Jim Rogers remains bullish on China and has been for quite some time. In his blog, he advises investors to look for opportunities in the country’s agricultural sector. (Source: “Jim Rogers: Big Growth in China Agriculture,” JimRogersInvestments.com, January 22, 2013, last accessed April 26, 2013.) This makes a whole lot of sense, given the more than 1.3 billion mouths to feed and a desire to produce more foods locally.

My favorite areas for investing in Chinese stocks are the infrastructure, agriculture, Internet, banking, and mobile sectors.

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