Chinese Stocks Poised For A Rally?

| November 5, 2012 | 0 Comments

Most stock markets around the world are showing solid gains for the year.  Germany’s DAX is up 24.8%, Hong Kong’s Hang Seng is showing a gain of 19.9%, and even Egypt’s CASE 30 index is higher by 53.9% just to name a few.

But the stock market of perhaps the world’s most important economy has been lagging all year.  China’s Shanghai Composite is down 3.7% so far in 2012.

Shanghai Composite

However, recent economic data suggests China’s economy has bottomed out and Chinese stocks are poised for a big rally.

Let’s take a look at the economic data first…

One of the most important gauges of the economy’s health appears to be stabilizing.  Recent GDP data showed that China’s economy grew 7.4% in the third quarter, matching analysts’ estimates.

While that was down from the second quarter’s 7.6% growth rate, many believe it marks the trough of the Chinese economic slowdown.

Surprisingly strong industrial production data also suggests China’s beginning a new expansion phase.  Industrial production increased by 9.2% in September.  That was better than the 9% median forecast of 37 analysts according to Bloomberg.

And it was significantly higher than the 8.9% increase seen in August.

What’s more, China’s services sector is on the recovery track.  The official purchasing managers’ index (PMI) increased to 55.5 in October after hitting a two-year low of 53.7 in September.  Stronger activity in the construction and retail sectors drove the gain.

But stronger economic data is just one part of the story…

Another reason why many experts are getting more optimistic about Chinese stocks has to do with the upcoming change in leadership. 

This week, China’s Communist Party starts its 18th National Congress.  The Party is expected to choose a new generation of leaders to rule China for the next 10 years.  And newly enacted age limits suggest that seven of the nine current members of the Politburo Standing Committee will be stepping aside to let younger leaders take over.

Many believe China’s new leaders will immediately enact stimulus measures to boost China’s stagnating economic growth.  These new leaders will want to ensure there is no social unrest to mar their ascendancy to power.

And the surest way to keep the people happy is to get the economy growing again.

This means we could see more interest rate cuts and possibly an economic stimulus spending program in the near future.  Of course, these kinds of measures are always bullish for stocks.

Given the uptick in economic data and the coming leadership change, many investors are climbing back into Chinese stocks. 

Last week, the Shanghai Composite posted its biggest weekly gain in more than a month.  Thanks to a 1.7% surge Thursday on the bullish PMI report, the index closed up 2.5% for the week.

Not too shabby.

However, despite the rally, Chinese stocks remain cheap by historical standards.  According to Bloomberg, the index is trading at just 10x estimated earnings compared to the historical average of 17.8x.

In other words, Chinese stocks have a ton of upside potential.

If you’d like to take advantage of the coming rally in Chinese stocks, you should take a look at my Chinese stock trading service, China Stock Insider.  We have buy ratings on a number of high-quality Chinese stocks that are trading at nice discounts to their projected growth rates.

And we recently closed out a nice winner.

A little over a week ago, we captured a 19% gain on leading telecom company China Unicom (CHU).

With China’s economy on the rebound and a new generation of leaders taking power, Chinese stocks are poised for a major rally.  This is one money making opportunity you don’t want to miss.  Click here for more information about China Stock Insider and which stocks you should buy for the coming rally.

Profitably Yours,

Robert Morris

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Category: Foreign Markets

About the Author ()

Robert Morris is the editor of Penny Stock All-Stars, an investment advisory focused on discovering small-cap and micro-cap stocks that are destined to become the market’s next Blue Chips. The Wall Street veteran and small-cap stock specialist is also a regular contributor to Penny Stock Research. Every week, Robert shares his thoughts with our readers on a variety of penny stock-related topics. In addition to Penny Stock Research, Robert also writes frequently for two other free financial e-letters, ETF Trading Research and the Dynamic Wealth Report. He’s also the editor of two highly successful and popular investment advisories, Biotech SuperTrader and China Stock Insider.

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