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Yawning gap between Chinese and American stocks

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bull_bear3 October, 2013 (Chinavestor) We said in the last Newsletter that upside looks limited for Chinese stocks for the fall, and we stick to it. September was a particularly good month for Chinese equities despite ending the month sharply lower in the last week. The Shanghai Composite Index rose 3.6% in September in-line with the China ADR Index. Still both these indexes are still deep in the red for YTD.

The Hang Seng Index (INDEXHANGSENG:.HSI) from Hong Kong advanced 5.2% in September and is back in the black for the year. Despite the good news for the month, Chinese stocks underperformed globally compared to major U.S. benchmarks such as the Dow Jones Industrial Average (INDEXDJX:.DJI) or the S&P 500 Index. This is clearly visible on the chart on this page, depicting the DJIA along key Chinese indexes. The Dow has been in the black for all of 2013 and is up 15.5% YTD, a far cry from the performance of Chinese indexes.

 

NL_201310_1

Interestingly the China ADR Index, designed to track the performance of Chinese stocks listed in the U.S., is correlating very closely to the Hang Seng Index and the Shanghai Composite. One would assume U.S. listed Chinese stocks were impacted by market sentiment in the U.S. But it hasn’t been the case, obviously. This may be an unfortunate development for China stock investors because despite a record year for the Dow, Chinese stocks continue to suffer.

This should come as a little surprise given that China, and Shanghai in particular, is the true home market for the vast majority of Chinese stocks.

NL_201310_2

Yet U.S. based China stock investors have to keep an eye on the domestic market because increased volatility plays a role in the performance of Chinese ADRs as well as in American companies that make a significant amount of money in China.

NL_201310_3

Apple Inc. (NASDAQ:AAPL), the most valuable global brand, sold goods and services worth $4,641 million in the second quarter earnings a profit of $1,440 million. This is almost twice as much as General Motors (NYSE:GM) made in China. See Net Income column on the corresponding chart. Ford Co. (NYSE:F) is the smallest in terms of sales and net income but looks a lot better than in same period last year when it was in the red. Given that Chinese ADRs tend to follow the performance of less known indexes like the Shanghai Composite and the Hang Seng, U.S. investors better keep tracking companies like Apple Inc. (NASDAQ:AAPL) or General Motors (NYSE:GM) for a Chinese exposure.

For those hard core China investors that prefer pure ADR listings, here is what was happening in September.

sectors_Sept2013

Capital goods, consumer cyclical, and technology stocks outperformed while utilities, energy and healthcare stocks suffered.

The bad news is that stocks making up capital goods and consumer cyclical sectors are those that we continue to shy away from. These stocks simply don’t meet Chinavestor’s investment criteria based on trading characteristics and transparency. So despite a stellar performance most of these gains are just paper gains and not real dollars in the pocket of investors.

Good news is that the technology sector is made up with a good number of quality Chinese listings. Among them are Baidu.com Inc. (NASDAQ:BIDU), NetEase Inc. (NASDAQ:NTES), Sina Corp. (NASDAQ:SINA) and Sohu.com Inc. (NASDAQ:SOHU). The advance of the sector is attributed to a solid performance of a good number of stocks. Baidu.com Inc. (NASDAQ:BIDU) rose 14.5% while smaller Sohu.com Inc. (NASDAQ:SOHU) surged as much as 26.6%. Changyou.com (NAASDAQ:CYOU), Sohu’s online game spun-off, rose even more not to mention the stellar resurgence of Chinese solar stocks. Trina Solar (NYSE:TSL), Yingli Green Energy (NYSE:YGE) and Suntech Power (NYSE:STP) jumped over 60% in September, albeit from a very low base.

Transportation stocks, airliners, ocean cargo and railway stocks all advanced as China’s manufacturing activity improved. Basic material sector owns a lot for Aluminum Corp. of China (NYSE:ACH). The sector heavy weight rose 12.2%, making up most of the advance on its own.

Of course September wasn’t flower beds of ease for every sector. Utilities, Huaneng Power Int. (NYSE:HNP) in particular, failed to advance significantly. The stock fell from just under $50 back to the $40s after paying a hefty dividend in the third quarter. Now investors are looking for a reason to buy the stock again.

Besides utilities, energy stocks failed to impress investor in September. Most of the weakness is attributed to an easing tension with Syria, helping the price of oil remain just over $100/barrel. Lower oil prices helped Sinopec (NYSE:SNP), China’s largest refiner, to report improved margins but hurt oil producers like Petrochina (NYSE:PTR) and CNOOC Ltd. (NYSE:CEO). Sinopec (NYSE:SNP) rose 8.8% while PTR and CEO advanced a mere 1.1% and 0.6%, respectively.

Chinese health care stocks were mixed with Mindray Medical (NYSE:MR) staying virtually flat. This is bad news for the rest of the sector because Mindray’s market cap is more than the rest of the sector combined. Other players of the sector include WuXi Pharma (NYSE:WX), Simcere Pharma (NYSE:SCR), Chindex International (NASDAQ:CHDX) and Sinovac (NASDAQ:SVA).

BIDU_20130930

While historical data is important, investors are really interested in what the future holds. There is no one to know it for sure but we are of a view that a bullish sentiment is almost always a good thing. One of the most common ways to asses investor sentiment is by looking at moving averages. Common wisdom holds that when a stock is trading above its 200 day-moving-average (DMA) as well as above its 50-DMA, that is a bullish sign.

We counted 57 such Chinese ADRs at the end of August out of which we highlight the following stocks for your review. BIDU, SINA CTRP, GSH and SSW. See following chart to review Baidu.com Inc. (NASADAQ:BIDU) as an example.

These companies have sound trading characteristics (e.g. sufficient trading volume), are relatively transparent and have sound fundamentals. These companies meet Chinavestor’s investment 101 criteria. If anything, these stocks are worth a second look.

Wish you successful investing, Blaze Fabry.



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