Why Are Chinese Stocks So Hot Right Now?

I have written many times in many Cabot Wealth Advisories that the market wants to take your money. And that’s the literal truth; I’m not backing off that one inch.

But what’s also true is that, every once in a while, the market loves to surprise the heck out of you in very delightful ways. And we’re right in the middle of one such episode.

I’ll let the chart do most of the talking, but here’s the setup. The asset being charted is an ETF that tracks the performance of Chinese stocks that trade on U.S. exchanges as American Depositary Receipts (ADRs). It has a long name—PowerShares Golden Dragon Halter USX China (symbol PGJ)—but we just call it Golden Dragon.

If you look at a long-term chart for the Golden Dragon, you’d see that it hadn’t made any progress since October 2013. Yes, there have been four significant rallies and three similarly weighty corrections since then. But for that period of almost two and a half years, the net progress has been pretty much nothing.

Until now.

Here’s the chart.

The word that growth investors use to describe rallies like the one the Golden Dragon has been in since March 16 is “blastoff.” And there aren’t many situations where it fits more. Without any real preparation or warning, the ETF just took off vertically and kept going.

And why has this remarkable rally taken place? I don’t really know. I didn’t see it coming and I can’t give you chapter and verse about who the buyers are and why they have come to life now.

I know that the long, long period of sideways trading in Chinese stocks has built a powerful base for a rally. And I know that the recent spate of bad news about the Chinese economy has likely squeezed out the last of the Chinese investors who weren’t totally committed to staying invested there. After all, the moment of greatest discouragement and despair is the moment the next rally begins.

But the important thing about any rally isn’t why it’s happening. It’s what to do while it’s happening. And I have a couple of ideas about that.

Cabot Emerging Markets Investor, which I write, has been doing quite well in recent months. But that’s because of good stock picking, not because the market has been doing well.
But with a market that’s as hot as China is now, you can take your pick of metaphors: The wind is at our back. We’re on a downhill straight and we’re picking up speed. The stars have lined up in our favor.

How should you react? Well, I don’t advise selling all your other stocks and jumping into Chinese ADRs with both feet. After all, something that’s streaking higher can also streak lower.

But the portfolio of Cabot Emerging Markets Investor was properly positioned when the rally ignited, and it has done wonders for our portfolio. We had a significant exposure to strong Chinese stocks, plus a cash reserve that we maintained because the market was doing more sideways trading than heading for the sky.

And since the rally began, we’ve been steadily ramping up our exposure to the strongest Chinese stocks. That’s what you do in a rally.

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