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Strong September, what October?

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think_1 October, 2012 (Chinavestor) September 2012 defied statistics. The ninth month of the year is historically one of the most bearish and skeptics were not bashful voicing concerns in August. Yet the Dow Jones Industrial Average (INDEXDJX:.DJI) advanced 2.6% for the month and is up 8.4% YTD. The China ADR Index, compiled by Chinavestor and designed to keep track of the performance of Chinese stocks listed in the U.S., rose 3.2% on the same time. Even better, the Hang Seng Index (INDEXHANGSENG:.HSI) broke away from the Shanghai Composite Index (SHA:000001) and surged 7.0%. Hong Kong’s main gauge is up 10.4% YTD as a result. The Shanghai Composite Index (SHA:000001) rose a mere 1.9% after a volatile ride in September but is still off 3.8% YTD. The index shed 13.2% in the last six month in a sharp contrast to these other benchmarks. Investors in China look at mounting signs that the world’s second largest economy is cooling off and with no government stimulus in sight, bears took the driver seat in Shanghai.

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The economic picture is a mixed bag in the U.S. The housing market delivered the best news for the month by reporting home price increases all over the country. But the jobs market remained weak and Washington is addicted to “budgetary crystal meth”, according to widely respected Bill Gross from PIMCO. And it’s not just lack of budgetary discipline made worse in election year that is worrisome. Durable orders sank 13% in August to multiple year lows while U.S. GDP growth got revised downward for the last quarter.

Now that the U.S. is not out of the woods yet, European financial worries multiplies fear on Wall Street. The Spanish budgetary cuts and subsequent world wide rally late September is a prime example how much a role Europe plays in the psyche of global financial players. And it does play a significant role for a reason. As the nearby chart testifies, Europe is still in recession with household credit and non-financial loans not showing signs of a pick up. Only money supply is sufficient but people don’t spend when they’re fearful of their jobs. I couldn’t agree more with my friend at the Thaler’s Corner who wrote that “application of harsh austerity treatment in the midst of a severe recession is counterproductive. The decline in the Debt/GDP denominator accelerates the flight of private capital, thereby making the country's economy all the more vulnerable to "negative disequilibria”.

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It is certain that Europe subscribed to a different medicine to the financial crisis than that the FED adopted. Instead of keeping rates low and do whatever possible to revive inflationist expectations, some influential European policy makers keep fighting inflation and budgetary discipline as key to end current recession. The result of such medicine is questionable at best as frequent protests against such austerity measures in the streets of Athens and Madrid testify. There is not much to change going into October. Investors have to brace themselves for a volatile market environment.

Despite all odds, U.S. markets rose in September ahead of third quarter corporate earnings. Alcoa Inc. (NYSE:AA) will kick off the earnings season a week from today, followed by mainstream Chinese companies a month later. Baidu.com Inc. (NASDAQ:BIDU), Sina Corp. (NASDAQ:SINA), New Oriental Education (NYSE:EDU), Sohu.com Inc. (NASDAQ:SOHU) and Changyou.com Inc. (NASDAQ:CYOU) have been historically the first ones to report and we shouldn’t expect it differently this time.

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Strong U.S. market sentiment lifted Chinese stocks in return, as is evidenced by the nearby chart. Chinese financials outperformed the rest of the market in September. China Life Insurance (NYSE:LFC), the industry heavy weight, rose 8.2% while smaller China Finance Online (NASDAQ:JRJC) and CNinsure (NASDAQ:CISG) surged 15.3% and 17.1%, respectively. Most likely it was a dead cat bounce for China Finance Online (NASDAQ:JRJC), a stock that has fallen 57.2% since May, but anticipation of improving earnings from China Life Insurance (NYSE:LFC) could continue to lift the stock.

Huaneng Power (NYSE:HNP) represents utilities after Harbin Power went private and the stock hasn’t disappointed this year.

Energy sector rose 5.9% in September thanks to a superb performance of oil and coal miners. Petrochina Co. Ltd. (NYSE:PTR) and CNOOC Ltd. (NYSE:CEO) rose the most among components of the sector.

Leaders among services stocks advanced universally albeit at a conservative rate. New Oriental Education (NYSE:EDU) surged 19.4% in September, the most among components of the sector. But the company still has a lot of ground to make up after the disastrous July collapse when the stock fell 60% in one week. I continue to advise to stay away from the stock given the nature of the collapse.

Basic materials were mixed with Aluminum Corp. of China (NYSE:ACH) and Silvercorp Metals (NYSE:SVM) taking the lead. But that rally might be short lived should Alcoa Inc. (NYSE:AA) miss estimates next week. Investors should exercise caution when dealing with the sector.

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The Chinese healthcare sector is a tricky one. The sector is made up of one medium sized company and seven volatile small caps. We have kept a close eye on Mindray Medical (NYSE:MR), the largest player in the sector, for a long time. We continue to like the stock based on fundamentals. The stock is up 36.5% YTD, one of the best picks among stocks in the Growth portfolio.

But the rest of the sector is considered too risky with little visibility for our investment threshold.

Chinese tech stocks

October is gong to be a challenging month for investors. With earnings not out yet, one can rely on anticipation of earnings and subsequent swing trading.

Chinese tech stocks offer one of the best trading opportunities for traders. There are several stocks from this group that have good trading characteristics, sufficient volume and sound fundamentals. Timing is key when it comes to stocks like Baidu.com Inc. (NASDAQ:BIDU) or Sina Corp. (NASDAQ:SINA), just to name a few. Considering the amount of money made online in China vs. U.S. industry leaders and that China has over 300 million people without internet at the present, the sector continues to command attraction.

September was not good for consumer stocks though. Consumer durables actually fell, the only sector to do so, while consumer cyclical stocks eked out a small gain. Part of the problem is lack of visibility into the sector. Chinese ADRs from the consumer area are low cap stocks with minimal trading volume where bookkeeping is not considered in the vanguard. This keeps away educated investors for a good reason. Instead, we continue to like stocks that have demonstrated constant revenue and earnings growth while carry virtually no debt. Wish you successful investing,

Blaze Fabry.



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