China is Powering Ahead


A New Source for Liquid, Leading Stocks
China is Powering Ahead
Game On! At NetEase (NTES)

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I know you’re probably busy, what with Christmas Eve and a final bit of shopping. I need to run out and grab a couple of last-minute items myself, so I’ll keep this short.

It’s been a mediocre year for stock markets, with the S&P 500 and the Dow Industrials on track for small losses and the Nasdaq up just an anemic 6%. That makes it a bad year in general for most equity investors, with a special slap upside the head for index investors.

The only way to make significant money in stocks in 2015 has been to own a few of the liquid leaders, the stocks that present the ideal combination of story, fundamentals and chart strength (and trade on sufficient volume) to allow institutional investors to pile in. This relatively small group of stocks has been the salvation of many portfolios in 2015. A savvy mix of risk management (primarily heading toward cash when markets were in a blood-thirsty mood) and exposure to these liquid leaders would have gone a long way toward improving your results. But as 2016 looms larger in the windshield, I have another idea. Buy China.

I know that you’ve probably been reading headlines about the perilous state of the Chinese economy, and you think that investing there is too nervous-making to attempt.

As I said, I’m making this short, so I have just two pieces of evidence to help convince you that adding some China to your portfolio is a good idea. First, here’s a daily chart of PowerShares Golden Dragon Halter USX China ETF (PGJ) showing its performance during the last six months. The Golden Dragon tracks the performance of Chinese stocks that trade on U.S. exchanges as ADRs (American Depositary Receipts). You can see that PGJ fell from the middle of June through the end of September, including the same August free fall that hit U.S. markets.

But the astonishing phenomenon is that October brought a rally in PGJ that’s still going on, making it clear that investors are finding attractive buys among Chinese ADRs. The Golden Dragon has twice dipped to its 25-day moving average, and both times has powered ahead to stay nicely above both its 25- and 50-day moving averages. That’s not just strength, that’s momentum! (If you think that maybe Chinese stocks are faring well because all emerging market stocks are prospering, take a look at the chart for the emerging markets ETF, iShares MSCI Emerging Markets (EEM). It’s instructive.)


My other piece of evidence is an illustration of why Chinese ADRs are so strong. It’s a chart of NetEase (NTES), a Web portal that’s thriving by serving the enormous Chinese appetite for online games. All Chinese portals have games, but starting with winning the exclusive license to operate World of Warcraft in China, NetEase has made a major commitment to massively multiplayer online role-playing games (MMORPGs). The company has moved to bring most production of new games in-house, ramping up 3D abilities and using Chinese myth and literature as sources for its game themes.

NTES has upped its roster of institutional supporters from 340 a year ago to 455 today. Estimates are for 22% revenue growth this year (that’s likely very conservative) and 23% in 2016. The great story of Chinese stocks isn’t the Chinese economy. It’s the companies that are providing the stuff Chinese consumers want to buy (such as Alibaba) and the games they want to play on their brand new cellphones.

And, conquering my natural modesty, I’d have to say that I’m very good at finding the companies (like NetEase) that are powering the advance of China’s stocks.

China isn’t the only game in town, of course. I’m constantly trolling the ADRs of stocks from all over the emerging world for leaders. I even have a couple in the Cabot Emerging Markets Investor’s portfolio right now. But growth investing is all about following leading stocks, and China is particularly rich in them right now.

To add some diversity to your portfolio and find a new source of liquid, leading stocks to give it some backbone, just click here to get started. I’d be delighted to help you grow your portfolio in 2016! 

Merry Christmas!

Paul Goodwin
Chief Analyst, Cabot Emerging Markets Investor
and Editor of Cabot Wealth Advisory

Paul Goodwin can be found on Google Plus.

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