If your stocks have limited China exposure, then don't expect
outperformance in 2013. Exposure might be buried in revenues or
equity risk taken directly, but it MUST be there. That is because
China is a market elephant now; you can't avoid it.
The internal migration reshaping the country?
- Epic
Its demand growth?
- Picking up
Investment signals?
- Positive!
All of this provides a strong catalyst to take shares higher. So in
the next few paragraphs, I am going to show you what is going on
with China and how to invest more successfully in 2013 because of
this key trend.
What is Going on With China's Economy?
China's consensus GDP forecast is rising.
Growth is forecast at +8.1% for 2013 after +7.7% in 2012. We heard
much about China's slowdown, but not much about its current
recovery. Truth is, over 40% of ALL the world's economic growth
comes from China -- no small matter for investors.
Inside China's financial markets, I see upside -- China's retail
sales are up +14% year over year. With low forward P/E ratios,
Chinese stocks look reasonable even after the recent eight-month
long rebound. China's managed currency may be a political hot
potato, but it lowers currency risk for investors.
China's CYCLICAL slowdown signaled its end in June 2012.
The 2012 slowdown was a back-end signature of their huge 2009
fiscal stimulus. Late in 2010, tight money began to attack a
housing price bubble. Two years later, slower growth cooled prices,
and put in place a stable expansion.
In June 2012, the People's Bank of China [PBC] cut its average 6.5%
rate to 6.0%. It can go to 5.3% to match the 2010 low. To skeptics
who see slack, I ask this:
Why doesn't the PBC go to 5.3%?
After ending speculation, housing bottomed. Prices have come down
-10% to -15%. Wage growth of +10% to +20% a year means home
affordability is up +30% to +50%. Now, home and auto sales -
accounting for 40% of China's consumer spending - should pick up.
More . . .
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How does a bull respond to criticism that China is just a
pumped-up Communist State focused on cash flow rather than equity
returns?
The answer: There is an epic move underway. The Chinese economy is
around 50% rural, while the U.S. is under 2% rural now. In 2000,
China was around 35% rural. This internal migration is in its
middle stages, with citizens moving from small farms to work in
factories, while living in apartments in cities. High growth
reflects supply and demand - in terms nearing 200M migrating
peasants.
Net urban-rural migration in China? - a whopping 21 million for
2015.
Break this into Hokou (migrants with local residency rights) and
non-Hokou (migrants without local residency rights) or the
"floating population". In manufacturing and construction, non-Hokou
workers make up 43% and 56%, respectively.
How This Affects the World Economy?
The global growth bright spot in 2013 - China.
Outside Asia, growth looks flat. The world's GDP growth forecast is
+3.2% for 2013, compared to +3.3% for 2012. Strong China growth and
weak growth in advanced countries is not unrelated. China may be
the only major economy right now where monetary policy works the
way it is supposed to. In Japan, Europe and the U.S., the tail of
weak GDP growth wags the dog of monetary policy.
Zero rates in advanced countries point another finger towards
investing in China.
This is an unintended, but not an unforeseen, consequence. Fed and
ECB policy tries to raise domestic growth via interest rate
pre-commitment and bond buying. However, look for higher P/E
multiples on all stocks, including Chinese stocks.
The reason?
Low rates push investors into risk.
Faster Asian development means capital flow and currency
appreciation pick up.
In Asia, countries compete for exports to slow-growth advanced
economies. Currencies like the Singapore Dollar and South Korean
Won rose +7% in 2012. Appreciation is the likely trend in 2013 for
the entire region, except Japan and Australia. Another benefit for
the right stock investors!
Now, What is the Investment Strategy?
You have to position yourself for growth in the Chinese
economy.
By 2013, there will be 1.36 billion people in a China with $18
trillion in GDP, at constant prices. By 2015, GDP gets to $21
trillion. In two years, $3 trillion in new spending materializes -
20% of the current U.S. economy.
A major policy catalyst in 2013 - new Chinese leadership comes
into power.
A value investor has a play. China is five years out from a major
sell-off on the Shanghai Composite. Share prices went from over
6,000 to 2,100. They are now around 2,300. Below, I see upside
continuing for the FXI iShares China 25 Index.
FXI China 25 Index Fund (blue) vs. S&P 500 Equal Weight
(green)
FXI China 25 Index Fund (blue) vs. Industrial Inputs Price
Index (red)
How to Play this Trend?
Chinese or non-Chinese picks can track China GDP growth and
confidence.
When China grows +8% a year, and purchasing parity adjusted incomes
are $12K, out emerges +$1000 in fresh income to capture each year.
You don't have to buy Chinese stocks to tap into that opportunity.
From consumer discretionary stocks to auto makers, industrials, old
school materials; there is no shortage of U.S. based companies that
stand to benefit from this trend.
What To Do Next?
First, look for the companies experiencing better-than-expected
growth. Considering the trends in place, that growth will likely be
tied to what is going on in China. The good news is that our proven
Zacks Rank stock-rating system will isolate these companies and our
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Best,
John Blank
As Chief Equity Strategist, John Blank, PhD, publishes weekly
articles and monthly periodicals on the global financial markets
for Zacks Premium subscribers and Zacks.com. He also appears on
television channels such as CNBC and on a weekly Chicago radio talk
show, Investing in Today's Markets, to discuss Zacks Macro, Zacks
Market Strategy, and Zacks Consensus Strategy reports.
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