The China Bounce


If you want a good illustration of how quickly the stock market can digest bad news and beg for more, you just need to look at what’s happening with Chinese stocks.

A little over a month ago, on September 28, the PowerShares Golden Dragon Halter USX China ETF (PGJ)—which represents the performance of all Chinese stocks that trade on U.S. exchanges—closed at 24.6, retesting its late-August low at 24.8. That September 28 close represented a 27% correction from the Golden Dragon’s June 17 high at 36. At that time, headlines were trumpeting the slowdown in the Chinese economy, the apparent powerlessness of the government to stimulate growth and the global gloom engendered by the Greece crisis (if any problem that goes on for more than a year can be called a crisis), the Fed and general chaos around the world.

In fact, there are still plenty of headlines about all of the above problems. The Fed has yet to begin raising interest rates because they’re concerned that China’s economic problems might prove to be a drag on global growth. The European Central Bank says that Greek banks need 14.4 billion euros to “get back on track.” Russia is still, well, not playing nicely with others and military matters in Syria, Iraq, the East China Sea and elsewhere seem to be taking up a lot of investors’ mental bandwidth.

Given all that, why does this six-month chart of PGJ look so good?

The rally that began in late September is now in its sixth week, and we have noted that stocks from the strongest growth industries in China are leading the rally. We are seeing big rallies in e-commerce stocks, online gaming and mobile search. What they all have in common is that they are businesses conducted almost exclusively via mobile devices, the overwhelming choice for Chinese who want to access the Internet, shop, play games, visit social media, get news and send messages.

If you ever needed any proof that markets can eat and digest a ton of bad news and stay hungry, this is it. Yesterday’s horrifying China headlines have been read, analyzed, priced into the market and essentially forgotten about.

That’s a little less the case with the rest of the emerging world. When you look at iShares MSCI Emerging Markets (EEM), you see a bounce beginning in late September, just like PGJ, but that move has leveled out after just two weeks and EEM has been trading sideways under resistance at 36. The performance has been good enough to keep our buy signal intact, but it looks like investors are finding more stocks to love inside China than outside.

The bottom line is that we are in a situation where having strong predictions about where the markets are going isn’t much help. Conversely, for market followers like us, the situation is ideal. We follow the leaders that the market gives us. It’s working.

This is an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief Analyst Paul Goodwin has been a researcher and writer for over 30 years and a member of the Cabot investment team since 2005.

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Paul Goodwin can be found on Google Plus.

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