Chinese Stocks Rally To End 2012

| December 31, 2012 | 0 Comments

The past three years have been challenging for Chinese stocks to say the least.  After trading around 3,200 in January 2010, the Shanghai Composite slid to just under 2,000 in early December 2012.

That’s a 35-month decline of 37%.

However, it looks like the trend is finally changing for the better.

Shanghai Composite

As you can see, Chinese stocks have rallied hard throughout the month of December.  After hitting a low of 1,950 earlier in the month, the Shanghai has surged 16% over the past few weeks.  And it’s now trading above 2,260 for the first time since June.

No question about it, Chinese stocks have moved significantly higher in a very short period of time.

But perhaps the most exciting news is that the Shanghai closed out the year with a gain.  Rising 3.2% for all of 2012, the index finished in the black for the first time since 2009.

What’s going on?

Investors are starting to believe China’s economy is entering a new phase of expansion. 

After seven quarters of declining growth, China’s economy appears to be turning the corner.  The most recent evidence of this trend is a strong jump in the HSBC Purchase Manager’s Index for December.

This important gauge of manufacturing activity finished the month at 51.5.

That’s up from the preliminary reading of 50.9 on December 14th and the final reading for November of 50.5.  A level above 50 indicates the economy is expanding.

What’s more, the index rose more than even the experts were expecting.  According to Bloomberg, the “median forecast of 14 economists… was for a final reading of 50.9.”

The surprisingly strong increase suggests the economy is ramping up even faster than most believed.

And it looks like this is just the beginning of a longer-term trend. 

In a statement to the public, HSBC’s chief economist said,

“Such momentum is likely to be sustained in the coming months when infrastructure construction runs into full speed and property-market conditions stabilize.”

He went on to say…

“This–Plus Beijing’s reiteration of keeping pro-growth policies in place into the coming year–should support a modest growth recovery of around 8.6% year on year in 2013 despite the ongoing external headwinds.”   

If this prediction is accurate, we should see Chinese stocks continue to move higher.  GDP growth of 8.6% next year would represent a significant improvement for China’s economy.

After all, GDP was increasing at a rate of just 7.4% as recently as the end of the third quarter.

That marked the slowest level of growth seen in China since early 2009.   And it was a far cry from the 10% annual growth averaged over the past 30 years.

So you can see how a return to 8.6% growth next year would indicate China’s economy is back on track.

Of course, nothing would be better for Chinese stocks overall than an expanding economy. 

A growing national economy means steady quarterly increases in corporate revenues and earnings.  And rising sales and profits usually means higher and higher stock prices.

If you don’t have any exposure to Chinese stocks, you may want to add some right away.

The iShares FTSE China 25 Index Fund (FXI) is a simple and convenient way to do just that.  Or, if you want to make a bigger bet on this market, you can go with a double-leveraged ETF like the ProShares Ultra FTSE China 25 (XPP).

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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