Business as Usual

 

This was an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief analyst Paul Goodwin, Cabot’s international investing guru, provides your passport to profits.

Tuesday’s growth numbers from China were a mixed bag for those tracking the health of the Chinese economy. On the one hand, the reported 6.9% GDP growth in the third quarter was slightly ahead (by about a tenth of a percent) of the consensus forecast.

On the other hand, that 6.9% number is the slowest growth since 2009—during the Great Recession—and comes in spite of a program of interest rate easings (five cuts since last November) and other stimulus measures.

China skeptics—both those who doubt the veracity of any numbers reported by the Chinese government and those who are actually rooting for China to fail—are having a good time with the latest numbers. With a little effort, you can also find plenty of people who see other signs of weakness and other sources of concern.

Fortunately, we don’t have to sort out the fly crap from the pepper (an expression used by the scientists who were trying to sort out the cosmic background radiation from all the other noise in the universe).

Right now, enough investors are confident enough that China’s economy is doing well enough that they’re maintaining their exposure. You can see that represented in the year-to-date performance of the Golden Dragon ETF (PGJ, which tracks Chinese ADRs on U.S. markets) and the iShares MSCI Emerging Markets ETF (EEM, which follows all emerging market ADRs).

The first divergence between PGJ and EEM came during the April–June Chinese bubble, when Chinese shares kept climbing well after the broad emerging-market ETF rolled over under pressure from lowered appetite for commodities. Chinese stocks began to correct strongly in June, and got back in sync with the rest of the emerging markets during the August market meltdown.

The second divergence is the stronger performance of Chinese stocks since the retest of August lows in late September. The push higher by PGJ has returned Chinese ADRs to profitable status for the year, contrary to what the general skepticism about China’s economy might suggest.

But the biggest lesson is still that investors remain optimistic enough about China to keep their money at work there. We have our eyes on several Chinese stocks with good stories and fundamental numbers but only mediocre charts. We even have some on our watch list.

For now, however, we’re content to cherry-pick the strongest stocks from all emerging markets, finding those that are attracting investors and showing price strength. In other words, it’s business as usual, despite all the disquieting news out of China.

A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and chief analyst of Cabot Emerging Markets Investor since 2005.

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