Five Ways to Invest in China and India

Continuing on with the notion that we've made an interim bottom in the S&P, in this post I want to take a quick look at both the Chinese (the Shanghai index) and Indian (the Bombay Sensex). Unsurprisingly, they both appear to have bottomed based on extremely over sold RSI and stochastics.

The Shanghai Stock Exchange Composite Index [SSEC] declined from a high of 6124 in October to a low of 3271 or 46.6% in a little over five months. Measured from the 2005 low just under 1000, it has given back over 50% of the gains. The low of 3271 was between the 50% retracement and a very strong support at around 3000 that went back to Feb.and Mar. 2007. Back then, a 9% one day drop in the SSEC was the shot heard around the world, but it's hardly noticeable in this chart.

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The 61.8% retracement sits just under 3000. While there is some danger that the 3000 level is in play since the 50% retracement was taken out, the extreme RSI reading argues for at least a temporary rebound. At any rate, the 3000 level has every reason to hold if things come to that. So I would argue that the risk/reward here is acceptable for a long term investor. Among the myriad of China funds, my old favorites are iShares FTSE/Xinhua China 25 Index Fund (FXI) and Morgan Stanley China A Share Fund (CAF).

Unlike the SSEC, the Bombay Stock Exchange [BSE] has suffered much less technical damage in comparison. Recent lows in RSI and stochastics were consistent with previous bottoms. It's also important to note that stochastic buy signals in the weekly chart were often followed by many months of steady increases. I would consider Barclays Bank PLC iPath ETNs linked to the MSCI India Total Return Index (INP), The India Fund Inc. (IFN), or even the new Wisdomtree India ETF (EPI), here.

click to enlarge

Comments

[nhsrikanth1:]

Misleading heading, was it motivated by drawing in readers who otherwise have no interest in the TA mumbo-jumbo?

2008 Apr 09 12:39 PM

[semuren:]

CAF is about the only vehicle for non-PRC individual investors to get into the A shares market, so it is relevant to a discussion of the SSEC, though not really a proxy for the index. But FXI is all HK traded H and Red Chip shares. Even when companies are dual listed on the Shanghai and Hong Kong exchanges the shares trade a wildly different valuations. (There is even an index measuring this.) And A shares have been at a huge premium to the HK listed shares in the same companies. What FXI really trades like is a high Beta for the US market, reflecting US investor sentiment about the idea of investing in China. It is often totally out of sync with A shares. So I really have to question using FXI as the investment vehicle to capture an investment idea based on the A share market.

2008 Apr 10 01:34 PM

[d_teller:]

Yes, 'semuren', you hit the nail on the head...CAF vs. e.g., GXC. vs FXI, makes for interesting comparisons, since stock pricing by the "Mob", whether it is China's nationals, or U.S. investors looking at a basket of SOE's trading as ADR's...is worth investigating.
I think CAF tends to lead the other two in terms of price performance. I have held all three, in addition to MCHFX and FHKCX.
Volatility is opportunity.

2008 Apr 10 10:18 PM

[James Lewis:]

RSI/Stochastics are oscillating indicators not trending indictaors. They can not be used to work out bottoms of trending environments, ie in the one we are in currently in Shanghai. Using Rsi/Stochastics for this means is very very dangerous. Take alook at the extreme overbought readings on shanghai market daily/weekly for the past three years and you'll see what I am saying.

Long Term - I belive we are in a good place here to start buying.
I am waiting for 3000 because I have not seen a capitulation. Also the H-shares/A shares premium is still way too high. As the market went from 1000 - 6000, you need to use LOG charts which changes retracement levels anyway.

If you are dying to get back into the Chinese Market or want to trade it long-term and want to buy now. I would suggest looking at fundamentals of chinese companies listed in Hong Kong/Singapore.

2008 Apr 11 05:12 AM

[David Hepworth:]

I have found that these oversold moments have been good times to accumulate positions at very fair prices. If the global story moves from US financial hegemony to homogenization of pricing of goods and services globally, then the global growth story will be intact after the losses in the US financial system are digested. Always keep a long term time horizon and don't board if you don't like bumpy rides!

2008 Apr 11 10:49 AM

[Colin Chen:]

looking back at this TA, I believe the first poster got it right when he used the term "mumbo-jumbo"

2008 Apr 20 02:53 AM

[ACEMAN:]

Ain't no one studied Statistics 101 here? "Stochastics" by itself cannot be predictive but merely normative and thus the real outcome is to give the analyst confidence that his/her guess will be within a certain measured constraint such as a standard deviation. Stochastics as a predictor of price movement is a logical howler and a mixed metaphor at that and a misuse of language that sounds predictive. Which it ain't.

2008 May 07 10:12 PM