How the Chinese Market has Quietly Risen

Doug Fabian
Posted: May 30, 2014 12:01 AM
How the Chinese Market has Quietly Risen

The question of whether to invest in China is one that engenders many polarizing opinions. For every bull out there arguing in favor of a rebound in the Chinese economy and stock market, there are an equal (perhaps greater) number of bears proclaiming that China’s economic data cannot be trusted and that the country is destined for a massive debt explosion that will end up crushing the global economy.

Without getting into every detail of the bull vs. bear debate on China, I will say that I think that there are good points to be made on both sides. In the bull camp, China is unquestionably the second-largest economy in the world, with a burgeoning domestic middle class that has a voracious appetite for all sorts of consumer goods literally from around the world. In the bear camp, China has done a lot of infrastructure building, such as those infamous “ghost towns” where much of the real estate still waits for occupants.

For now, however, let’s put the pro and con arguments aside and look at something that gives us a more objective take on China, i.e., let’s take a look at the price chart of the biggest stocks in the Chinese equity market, theiShares FTSE China 25 Index Fund (FXI).

As you can see, since FXI fell to its March low, the stock has made a relatively quiet liftoff above the 50-day and 200-day moving averages not once, but twice. A late-March surge in China’s benchmark index saw FXI blast above the short- and long-term trend line, but that surge failed to hold in April.

This month, however, stocks in China have been on a concerted uptrend, blasting past the 50-day and 200-day averages again. The logical question now is will this uptrend remain in place, or will this proxy for the China equity market fake us out again?

I suspect that given the recent improvements we’ve seen in China’s PMI metrics (the closely watched HSBC China Manufacturing Purchasing Managers’ Index came in at 49.7, well above estimates for just 48.3), coupled with the latest buying in other China-based ETFs besides FXI, that the short-term answer is that the gains in China will continue.

This thesis is one of the reasons why we have exposure to China in some of our newsletter advisory service portfolios. If you’d like to find out just how to take advantage of the quiet China liftoff, then I invite you to check out mySuccessful ETF Investingnewsletter right now.