How To Play China's Rebound
Cam Hui | Nov 16, 2012 08:50AM ET
It should be obvious that China's economy has turned the corner. While we may not necessarily see gang buster growth, the risks of a hard landing are diminishing fast (see my previous posts ? ).
The Worst Is Over
The chart below of Chinese stocks (as represented by FXI) compared to the MSCI All-Country World Index (ACWI) shows that FXI rallied through a relative downtrend line in October, indicating that the worst is over for Chinese stocks. Moreover, FXI has retreated to test the downtrend line, which is now relative support, and this represents a good entry point for China bulls.
Given the volatility of Chinese stocks due to the uncertainty in political climate and weak corporate governance, a better way to play a rebound in Chinese growth may be through the markets of China's regional trading partners. The chart below of MSCI Pacific Ex-Japan (EPP) relative to ACWI shows that EPP is in a more robust relative uptrend. There is a short dated relative uptrend (dotted line) that began in October, which is supported by a longer dated relative uptrend (solid line) that began in May when EPP bottomed on a relative basis.
The Australian Play
Another way to play China's rebound is through Australian equities, such as EWA. A glance at APP's top-10 stocks shows that nine of them are Australian, which indicates that the Aussie market has the heaviest influence in EPP.
One can also gain exposure through the Hong Kong ETF (EWH). The chart of EWH vs. ACWI below shows that Hong Kong equities staged a relative breakout in late September and have been in a well=defined relative uptrend since. EWH does appear to be a tad overextended in the short-term, though.
Buy Both
Another way to diversify your exposure is to buy both Australia and Hong Kong. The bottom panel of the above chart shows the correlation between EWA and EWH, which currently stands at 0.62. While that is an elevated reading, keep in mind that is roughly the long-term correlation between stocks and bonds and therefore positions in those two ETFs should provide an adequate level of diversification while maintaining an exposure to the China bull story.
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