Genuinely Significant News from China


Investors have been a little cranky since November 4, when all of the major indexes started modest corrections. It may be that positive employment data (and the freedom that offers the Fed to raise interest rates) has forced investors to confront the probability of at least one rate hike this year. Whatever the reason, correcting indexes have the market on edge, and we’re facing a possible loss of our buy signal. If that happens, we will continue to manage the portfolio on a stock-by-stock basis, but will cut back on new buying.

The iShares MSCI Emerging Markets ETF (EEM) traded flat through much of October and has been under pressure over the last week. While EEM hasn’t fallen decisively below its lower (50-day) moving average, it’s a very near-run thing. PowerShares Golden Dragon (PGJ), which tracks Chinese ADRs on U.S. exchanges, has had a much better time, correcting mildly after a strong rally through the entire month of October. PGJ is still well above its 25- and 50-day moving averages, indicating that Chinese ADRs are stronger, as a group, than emerging markets stocks. We will continue to monitor the action of both ETFs.

This week has had more than its share of genuinely significant news about China and Chinese stocks. (That’s in contrast to the flood of sensational “stare and swear” headlines that usually dominate.)

The first news is that sales on China’s Singles Day (November 11) were up 60% from last year, making this sales event bigger than Black Friday and Cyber Monday combined. Singles Day—always November 11, because 1111 looks like “bare branches”—was originally a day when single Chinese bought themselves gifts online because no one else was buying anything for them. Alibaba took the quirky idea and ran with it, turning it into a kind of Jerry Lewis Telethon of spending. This year Alibaba sold $14.3 billion in merchandise (also up 60% from last year), nearly 70% of which was spent on mobile phones.

The significance of strong Singles Day sales (and it’s not all Alibaba, although the company dominates the event) is the evidence it gives that Chinese consumers have plenty of money and are willing to spend it. And that’s good news for the Chinese economy.

The second big story concerns today’s move by MSCI—the company whose indexes are the gold standard of performance in non-U.S. and emerging markets—to add 14 to 17 Chinese stocks listed in the U.S. as ADRs to its MSCI Emerging Markets Index and MSCI China Index. MSCI will announce the stocks to be included on its website today after the market closes. These changes are part of MSCI’s program of quarterly review and rebalancing. (A decision to add Chinese A shares to major indexes was recently put off until 2016.)

Having Chinese ADRs—the class of Chinese equities we have in our portfolio—included in MSCI indexes may have real impact on our results. The stocks added to the indexes will come in for a round of heavy buying as ETFs and mutual funds that do passive indexing of Chinese issues will adjust their weightings to reflect the new stocks’ inclusion.

The new stocks will be added to the indexes in two stages, half at the end of this month and half at the end of May 2016. But it’s reasonable to expect significant buying of leading Chinese ADRs, some of which we undoubtedly already own. Stay tuned.

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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