Back on Dec 5 2008, many investors didn’t agree when I wrote “China’s Stock Market Bottoms”. The China Shanghai Index SSE has risen over 22% from its bottom. The stocks I recommended have doubled, such as American Superconductor (AMSC) and Suntech Power (STP). I am not saying you should buy these two companies here, as I do see pullback imminent in this two stocks.
As a further comparison, I have plotted SSE and DOW in one chart. It is undeniable that China’s recovery is likely V shaped, very likely. American investors dreamed a V shape recovery here in the US, but reality is reality, and we don’t have it so far. So what’s causing the difference between the Chinese market and the US market? And, the same question I asked in the previous article: what should investors do this time?
- China is leading the stimulus globally. A $600B injection into an economy that is 1/3 the size of the US is enormous. It is beyond imagination of any economist. In other words, it has to work. We are experiencing short term deflation, however, with this stimulus it is going to inflate the price on anything from commodities to service industry. Isn’t this what we want in short term? Of course, we welcome short term inflation, most importantly for investor, this will inflate the stock price as well, and this is also what we want in short term.
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- Many data indicate that China’s demand in commodities such as steel, iron ore, and copper have been rising in the last few months. Domestic energy demand is also rising. Electricity demand is also catching up in the east part of China. A good sign that people want to pay attention is that President Hu visited Saudi Arab last week and signed an oil supply agreement, in which Saudi Arab agreed to meet China demand under any circumstances.
- With $789B stimulus passed by congress, we will have the similar impact here in the US. The US economy is eager for the new blood flowing. The timing of the huge stimulus tells me the November bottom is the bottom in the stock market.
- Investors should pay attention to commodity prices, the renewable energy industry and the financial sector. Renewable energy investment is a big part of the stimulus in both China and the US. China’s wind farm grew fast in the last year, it is estimated that wind energy will double this year by adding another 6.5GW. Wind turbine production is exceeding solar in the Chinese market as it is cheaper and cleaner. GE recently formed a venture with A-Power Generation (APWR), capable of producing 1.2GW annually to meet demand. German wind turbine giant Fuhrlander also expanded production in China recently.
- Unlike the Chinese solar industry, the US solar industry is doing better; Energy Conversion Devices (ENER) reported Q1 recently, topping Wall Street estimates. Sunpower Energy (SPWRA) also easily beat Wall Street expectations in Q4. Both companies’ stocks are rising steadily, while wind turbine producer Trinity (TRN) apparently is experiencing some headwind as its Q1 disappointed investors and the company idles plants.
Disclosure: author has no positions
