A Good Time to Buy the Dip In China Equities? (Part 4)

 

If you want to be happy, set a goal that commands your thoughts, liberates your energy, and inspires your hopes.”— Andrew Carnegie

 

Wall Street continues to make summer investors smile as new highs in the major indices were touched on throughout the week.

The benchmark S&P 500 Index (SPX) recorded a gain of 0.7% on the week, which puts it in the black for the year to the tune of 18.6%. The Dow Jones Industrial Average (DJIA) posted a small but solid 0.5%, while the Nasdaq (COMP) ended in positive territory by a slight 0.3%.

The past week’s gains may be slightly due to inertia, because it’s not exactly like there has been a plethora of positive economic news to support the record highs. It’s more like a dearth of bad news that has been the prime reason the equity market continues on the same merry uptrend that it’s been riding throughout most of 2013.

That uptrend could potentially reverse quickly as nearly one-third of the S&P 500 Index companies are scheduled to report earnings this week. However, the outcome may be a little bit skewed towards the continuation of more highs, however slight, considering that analysts have set the SPX estimate bar to a fairly low level, less than 3.0% growth.

This is a sharp drop from the predictions many industry analysts made earlier in the year, and is a level that apparently hasn’t been difficult for the S&P 500 companies to meet so far. Over 60% have exceeded consensus earnings expectations to date, while approximately 50% have beat revenue estimates.

With very little negative noise coming from the Eurozone, and the Fed likely taking a break from chatting up the markets, at least for the moment, the status quo seems to lend itself to the trend remaining in place.

That is, until inertia gives way to a consensus realization that the market may in fact be overextended and overbought, or a solid macroeconomic reason emerges to shift the trend into a correction mode.

Either of which can occur quickly in the relatively thinly-traded markets of the summer.

What the Periscope Sees

June’s 15% drop in the China’s Shanghai Composite Index now seems to be proving something of an overreaction from investors. The correction was largely due to concerns over China’s recent credit crunch and how severely it would impact the region’s rapidly cooling economy.

The Chinese government has made a strong push to curtail these concerns, offering up signals that they will loosen the reins on the credit markets, including some of the harsher restrictions put in place to slow the region’s overheated real estate market.

Fears of a sharp decline in China’s economic growth may also have been calmed last week as its finance minister predicted annual growth to come in at 7.5%, the minimum number the market wanted to hear. It is unlikely that number would be put out there by the high-ranking official unless Beijing was prepared to provide the necessary fiscal and monetary policies to support that level of growth.

Not impossible, of course, just not likely.

On the other hand, investors might heed the warning of the International Monetary Fund (IMF) that China will miss the IMF’s growth forecast of 7.75%.

But, as the saying goes, nothing ventured, nothing gained.

In that regard, it seems that June’s sharp drop can still serve as a “buy the dip” moment for those seeking exposure to the region’s emerging market.

Here is the current list of the top six China equity-based ETFs, ranked in terms of assets. Among the listed ETFs, only PGJ is in the black for the year, though arguably the other listed ETFs offer the most room for a rebound, thereby providing the best price levels for entry.

FXI — iShares FTSE China 25 Index Fund, -16.61%

EWH — iShares MSCI Hong Kong Index Fund, -3.60%

MCHI — iShares MSCI China Index, -13.40%

GXC — SPDR S&P China ETF, -10.49%

HAO — Guggenheim China Small Cap ETF, -5.54%

PGJ — PowerShares Golden Dragon Halter USX China Portfolio, +19.89%

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.