Good news is a rare commodity these days. Investors may be pushing the major stock indexes to new highs, but a quick scan of headlines won’t give you much evidence about why that is happening. But there are bright spots, like Chinese stocks.
The Chinese economy gave investors some good news this week in the form of faster-than-expected growth in China’s economy.
China has an official 2017 GDP growth target of 6.5%, and when Q2 economic growth came in at 6.9%, the attainability of that goal gained credibility. Analysts had expected the number to come in at 6.8%, and the beating of expectations, while small, had a palpable effect on investors’ perceptions. That’s because the consensus among economic forecasters is that the Chinese economy will slow in the second half of the year as the country’s long-term debt crisis takes a progressive toll.
The growth was powered by higher exports and manufacturing, especially steel, which may be a problem later. After all, the trade imbalance between China and the U.S. is a hot political issue, and the Obama administration imposed tariffs on U.S. steel imports when it was found that producers were dumping their steel at a loss.
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But all the potential problems and possible potholes aren’t really all that important. The single most important thing that investors interested in China can know is that Chinese stocks on U.S. exchanges are going up. Here’s a chart that shows the recent action of PowerShares Golden Dragon China ETF (PGJ), which tracks all Chinese American Depositary Receipts that trade on U.S. exchanges.
You can see the volatility, especially the May/June tug-of-war, but you can’t miss the strength of the uptrend that has pushed PGJ to new all-time highs this week.
I have seen articles advising investors how to “play” this uptrend by investing in ETFs that have exposure to China. And there is a certain logic to that idea. You get diversification, as the ETFs generally track an index that includes dozens of stocks. You also get liquidity, as the ETF is always sellable.
But I have a different idea, one based on the idea that collective investments like index funds are always a compromise. Such funds give you exposure, but that exposure includes the worst-performing stocks in the index right along with the top-performing ones.
My question is: Why not just own the best?
For instance, here’s a chart of Alibaba (BABA), the Chinese online commerce giant for the same period.
In addition to the bottom line, which is that BABA advanced by 75% compared to PGJ’s gain of 44%, you can see that BABA outperformed in consistency, resistance to corrections and ability to stay ahead of its moving averages.
And, in case you were wondering, I added BABA to the portfolio of Cabot Global Stocks Explorer (formerly Cabot Emerging Markets Investor) in late January.
And if you compared BABA’s performance to one of the most-popular China ETFs, iShares China Large-Cap ETF (FXI), the difference is even clearer. FXI has been having a great year, beating the S&P 500 by a significant margin with a gain of 20.6%. The lower gain comes because FXI holds many Chinese stocks that are in state-owned or state-regulated industries. Plus, the ETF charges a 0.74% management fee, which comes off the top.
While it’s true that investing in individual Chinese stocks involves more risk, subscribers to Cabot Global Stocks Explorer get the benefit of an experienced advisor (me), who has been riding the waves of the Chinese stock market for well over a decade. If you’d like to see how it feels to go from swimming in the market to water-skiing in the market, click here to get started.
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