China Investing: Wait For It...Wait For It...Now!

Includes: CHIQ, FMCN, FXI
by: Emerging Money

By Joseph Hogue CFA

If you’re thinking about China investing again, HSBC released its survey of purchasing managers in China’s manufacturing sector on Tuesday night with, shock, a twelfth-straight month of contraction.

The index rose slightly to 49.1 from 47.9 reported in September, but still came in below the important demarcation of 50.0 that signals expansion in the sector.

Not all was rain-clouds, though. New orders were reported at a six-month high of 49.7, and exports showed an upward trend to a five-month high. This is after the country reported a rise of 9.2% in industrial production for the month of September, up from 8.9% in August, and beating analyst expectations.

Beyond some planned infrastructure spending this summer and a hastened approval process for new projects, the government has been fairly quiet on monetary or fiscal stimulus since its last cut to the reserve requirement in May. The move followed several cuts to banks’ required reserves ratio and two interest rate cuts.

Many have been forecasting more cuts, but warned that the government may be too focused on keeping inflation low to move aggressively. While consumer inflation has ticked up lately to 1.9%, it is still well below the government’s target of 4%. More likely is that the government is holding off on larger-scale stimulus until the once-in-a-decade transition of power, which should take place toward the end of this month.

While I generally do not like trying to call a major inflection point in a market, I think those interested in China investing can make a reasonable bet on strength over the next few months. Production and investment data have already started to show positive momentum, and the manufacturing surveys are hovering just below 50. Any new stimulus programs by the new government could be the final shot needed to jump-start the economy and make China investing attractive again. Further, any reading above 50.0 in the manufacturing survey will be an important boost to sentiment, and should be good for a quick jump in asset prices.

While shares of the iShares FTSE China 25 ETF (NYSEARCA:FXI) have rebounded 23% off the 52-week low of $32.21 last October, they are still well off recent highs and trade for just eight times trailing earnings of the stocks held in the fund.

The government has made it an explicit goal to favor consumption in the economy and transition from an export model. The Global X China Consumer ETF (NYSEARCA:CHIQ) invests at least 80% of its assets in consumer companies that are either domiciled in, or whose revenues are primarily from China.

Focus Media Holdings (NASDAQ:FMCN) operates a liquid crystal display network of digital advertising in China. As of 2011, the company had approximately 170,000 LCD displays in about 95,000 commercial buildings in 90 cities. Shares are flat over the last 12 months, but well off the low of $18.00 set earlier this year. The stock trades at 16.5 times trailing earnings, but pays a 2.0% dividend.