Chinese Stocks To “Go Crazy” In Second Half Of 2011
It’s been a tough year so far for Chinese stocks. But a bright light is starting to appear at the end of the tunnel. We got two pieces of good news over the last couple of weeks which suggest the cloud over Chinese stocks may soon lift.
First off, new economic data shows China is getting inflation under control.
In April, consumer inflation eased slightly to 5.3%. That’s down from a 32-month high of 5.4% in March. Not a huge drop, but it was better than economists were expecting.
More importantly, the change in direction is a strong signal inflation may have peaked.
And that would be great news for Chinese stocks.
For months now, investors have been exiting Chinese stocks like passengers on the Titanic. The only difference between the two is the Titanic had a band playing while the ship went down.
Most of these investors are worried the Chinese government’s policies for busting inflation are failing. And they’re selling Chinese stocks because they’re afraid interest rates must go higher in the months ahead.
You see, stocks tend not to perform well in a rising interest rate environment. Investors often shun stocks due to fears the rate hikes will go too far and squelch economic expansion. Or even worse… send the economy into a recession.
But if inflation has peaked in China, we should see interest rates start to stabilize in short order. And if consumer prices continue declining, we might even see interest rate cuts later this year.
In either case, the end result would be the same…
A new bull market in Chinese stocks!
You see, the recent correction has left a great number of fast growing Chinese stocks trading at bargain basement prices. And with clear skies ahead, savvy investors are likely to pounce on these unloved, profit making machines.
But don’t just take my word for it…
Jim O’Neill, chairman of Goldman Sachs Asset Management, recently provided his own bullish outlook for Chinese stocks. In a recent interview with Bloomberg TV, O’Neill said China’s inflation is close to easing.
More importantly, he predicted Chinese stocks may “go crazy” in the second half of the year.
And O’Neill knows a thing or two about emerging markets. You might recall he coined the term “BRIC” which refers to the top emerging markets of Brazil, Russia, India, and China. The term is now universally used throughout the investment world.
But that’s only part of the story…
Bloomberg also reports Goldman Sachs is setting up a yuan-denominated private equity fund in China. The fund will be used to invest in a number of Chinese companies. Clearly, Goldman sees big opportunities in Chinese stocks.
Speaking of private equity funds…
Morgan Stanley Private Equity Asia (MSPE) made a move in China last week that shocked the investment world. They announced a $50 million investment in Yongye International (YONG). What’s so shocking about a private equity fund investing in a company?
You may have heard about the wave of short seller attacks against small Chinese companies with tiny floats. One of the short sellers favorite targets has been Yongye International. The company has been under fire for most of this year.
As a result, the shares are down more than 42% year to date!
Here’s the kicker…
Despite allegations of fraud, MSPE has stepped up and purchased 25% of the company. This is a very strong signal the crisis of confidence in Chinese reverse-merger stocks may be coming to an end. And if so, another heavy burden will be removed from the backs of Chinese stocks.
Now’s the time to start putting together your buy list for small-cap Chinese stocks. With the interest rate hike cycle and reverse-merger short attacks coming to an end, it’s only a matter of time before these high-octane growth stocks take off.
Category: Foreign Markets
