Time To Place A New Bet On China Equities?

Includes: FXI
by: Daniel Sckolnik

"Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success." -- Pablo Picasso

The bulls rocked out last week, clearing the table of mostly all things bearish, with the major indices going five for five in terms of winning days.

The contrarian move here, of course, would be to take some downside positions in anticipation of either a possible overdue correction, or at least a wave of profit taking by those investors fortunate enough to have gotten in early on the current bull run.

But bucking the headwinds of a strong trend is risky at best and seriously expensive at worst.

So what is a less obvious move than either jumping on a late bandwagon or a contrarian counter-move? Perhaps going back to a key emerging market, one that might currently be considered undervalued, could be a play worth exploring.

More specifically, giving some consideration to adding a bit of China's equity market to one's portfolio right now could provide a fair amount of upside potential to what has been, for the recent past, a nervous region for many investors to bet on.

One of the reasons to consider dipping your toe into the China behemoth, which is, perhaps counter-intuitively, still considered an emerging market in spite of its huge economy, can be found in the recent spate of government data indicating a substantial surge in China's exports. Up over 20% from one year ago, the numbers surpassed economists' expectations by double digits.

Though data out of China might reasonably be regarded as questionable in terms of accuracy, due to the past history of government data that is often trumped up to paint a rosy economic picture, the latest numbers showing a greater level of exports than expected was corroborated by a Bloomberg News survey, giving the report a greater degree of veracity.

The strong performance of exports out of China contributed to the creation of a February trade surplus, which topped the $15 billion mark, hardly a large number in comparison to a number of recent months but still higher than expected for February.

True, the PMI manufacturing numbers for the month were about as expected, which revealed limited expansion on the manufacturing front. But they didn't go in reverse and, taken together with the stronger-than-expected export numbers, the direction of China's economy could be considered to be showing signs of improvement.

So, through the prism of the current bullish trend, China might be considered something of a lagging indicator to the more robust, though still limited, U.S. economic recovery. As such, those investors late to the current Wall Street party might hop aboard a horse that arguably might have fresher legs.

What the Periscope Sees

Though it is technically possible for investors to buy Chinese stocks directly, the simplest way for U.S. retail investors and traders to make a play on China's economy is probably to buy a highly liquid ETF, such as FXI (iShares FTSE China 25 Index Fund).

FXI, which is the largest of the China ETFs in terms of assets, coming in at around $8 billion, tracks the FTSE China Index. It is composed entirely of Chinese equities, with a breakdown by sectors showing a preponderance of Financial Services (59%) followed by Communication Services (16%) and Energy (15%) with Basic Materials making up the balance.

While FXI is down over 3% on the year, compared to the S&P 500 Index (SPX), which is up over 10% YTD, there might simply be more upside potential in the Sino play then what is available in Wall Street's current round of new and near highs.

In that regard, China might just serve as a way to catch the tailwinds of Wall Street's current uptrend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: I receive compensation to write this article in my capacity as senior analyst for Sabrient Systems. I have no business relationship with any company whose stock is mentioned in this article.

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