Time to Get Back into China Stocks?

Jeff Macke

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The recently ignored scuffling over trade between the U.S. and China is heating up again with President Obama seemingly firing the latest round this past weekend. In closing comments at the Asia-Pacific Economic Cooperation Summit on Sunday President Obama told China to start behaving like a "grown-up" and follow International trade rules. Predictably the Chinese suggested they're not beholden to following a set of rules created by committee.

The U.S. has long been the best in the world at devaluing our currency to the benefit of our exporters, meaning there's no shortage of irony in the President's angry demands. Cynics might also note that the President's stance is one of politicking over prudence. But what matters to us at Breakout is how we can trade it. To Ed Dempsey, founder of Pension Partners, the answer is to get long China, perhaps even hedged with a shorting the Dow Jones Industrial Average.

Dempsey's view is less a handicapping of the nascent trading food-fight between the economic super powers and more about where the Chinese economy is relative to the U.S. The "Chinese market entered a tightening cycle long before other countries," Dempsey says.

This easing has slowed the nation's once torrid double-digit growth rate down to a still pretty strong 6%, giving the Chinese more flexibility with their rates than the rest of the world.

Dempsey notes that China "has been underperforming our markets and actually underperforming other emerging markets for a very long time." With evidence that the China is "softening up on their tightening" even as the Western world looks shakier by the day, the ETF specialist says it's time for U.S. investors to shift their attention East.

Dempsey likes the FTSE China Index Fund (FXI) and the lesser known Powershares Golden Dragon Halter (PGJ). The latter has a "lower weighting to Chinese financials," says Dempsey. It also has much lower volume than the FXI, suggesting would-be investors won't have as much liquidity as they may want on entrance or exit.

A glance at the charts of either ETF versus the Dow Jones Industrial Average over the last two years does indeed show the Dow outperforming China. The chart also suggests China has greater volatility (risk) while moving in the same direction as U.S. markets.

Dempsey doesn't disagree but offers a couple ways to play it. One is the get short the Dow against a long position in China. Another would be to let it ride and play China straight up with the idea that Chinese stocks will outperform almost regardless of what the rest of the world does.

"On a relative basis the Dow could be more flatline, with the Chinese market going up," concludes Dempsey.

Are you bullish on China stocks? Let us know in the comment section below.


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