April 03, 2013 at 08:43 AM EDT
“Year of the Snake” Favors U.S. Over Chinese Stocks

Favors U.S. Over Chinese StocksIt has been quite some time since I looked at Chinese stocks. The reality is that since the meltdown in Chinese reverse-merger stocks in 2011 and 2012, there has been an apprehension to buying Chinese stocks as reflected by the comparative performances.

In 2013 so far, the key U.S. stock indices represented some of top performers on the world stage. The 11.3% return by the Dow Jones Industrial Average is second to the Nikkei 225 in Japan, which has advanced a surprising 10.3% as of the close of March 28. While Japanese stocks have done well, I continue to favor other global markets and am wary of Japanese stocks. (Read “Why You Need to Avoid Japan to Save Your Money.”)

China’s Shanghai Composite Index was down 1.5% as of Monday and continues to be a disappointment for investors in Chinese stocks. In fact, the glory days when investors could have made money simply by buying Chinese stocks are long gone.

The Bloomberg China-US Equity Index, comprising the top-55 Chinese stocks trading on U.S. exchanges, is down 11.5% this year and 7.2% year-to-date. These are poor metrics, but an interesting thing we are seeing is a pickup in speculative buying in Chinese stocks that underwent reverse mergers. After a major sell-off, there is some renewed buying. The Bloomberg Chinese Reverse Mergers Index is up a surprising 10.98% this year. While the rally is encouraging, I would still be extremely careful when looking at this group.

The problem with China is the fear that the country is facing an asset bubble in its speculative real estate market. The government has introduced tough rules to try to curb the speculative buying of real estate, especially the buying of non-primary residences. So far, it’s working.

And while the country continues to try to drive up domestic consumer spending to offset the decline in export demand from the global economy, this remains a battle. China’s government is estimating its gross domestic product (GDP) to expand 7.5% this year, which is below the International Monetary Fund’s (IMF) estimate of 8.2% and much better than the comparative U.S. GDP growth.

There are some signs of an economic recovery; albeit, it’s still too early to get excited. China’s Manufacturing Purchasing Managers’ Index (PMI) came in at an expansionary 50.9 in March, according to the National Bureau of Statistics. The reading suggests an economy that is mending, but clearly not a breakneck rate like we have seen in previous years.

China is under new and youthful leadership that is aiming at supercharging GDP growth over its 10 years of control. While there is no guarantee that China will ever be the same as far as growth for investors, I continue to believe there will be opportunities, especially given the current poor relative performance of Chinese stocks. You just need to be careful.

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