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Time for some seasonal investing in China Add to ...

Happy New Year to investors interested in China! China begins to celebrate its New Year with the Year of the Dragon on Jan. 23rd. The celebration continues for the next two weeks. Chinese equity markets are closed from Jan. 23rd to Jan. 27th. The equity market in Hong Kong also is closed from Jan. 23rd to Jan. 25th.

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The Year of the Dragon is traditionally the year that the Dragon delivers good fortune, an encouraging thought for investors.

The Chinese New Year celebration in many ways is similar to the Christmas celebration in the Western world. It’s a time for family and friends to share great food and gifts. Traditionally, the Chinese exchange little red envelopes containing valuable gifts. In recent years, as the Chinese economy has expanded, the gifts have become heavier and more valuable because they frequently include gold and silver. No wonder that the demand for gold and silver by individuals in China recently exceeded demand in India.

The Shanghai composite index has a history of reaching a seasonal low just prior to start of the Chinese New Year. Thereafter, it tends to move strongly higher until the beginning of May. Average return per period during the past 10 periods was 8.0 per cent.

What about this year? History is about to repeat. The Chinese government recently hinted its intention of stimulating the economy following a period of monetary restraint. The hints are working. China’s December Purchasing Managers Index recovered from 49.0 in November to 50.3 in December. Additional stimulus is anticipated after the Chinese New Year celebrations. Significant changes likely will wait until important changes in personnel in key government positions are completed in the first quarter.

The easiest way to invest in China is with exchange traded funds. Investors with U.S. dollars can choose between 12 exchange traded funds listed on U.S. exchanges, and investors with Canadian dollars can choose between three exchange traded funds listed on the Toronto Stock Exchange.

Only four U.S.-listed ETFs have a market capitalization in excess of $240-million and are worth considering for investment purposes. Each has unique characteristics.

By far the most actively traded China ETF is iShares FTSE China 25 Index units . The index tracks 25 big-cap Chinese equities. A word of caution: The index is heavily weighted in one sector. financial services represents approximately 51 per cent of the index. Net result is that units have a relatively low correlation with the benchmark Shanghai composite index. Management expense ratio is 0.72 per cent.

Investors looking for an actively traded security that has a high correlation with the Shanghai composite index might consider the Morgan Stanley A Fund , a closed end fund that owns a more diversified portfolio than the iShares unit.

Other actively traded U.S.-listed ETFs include SPDR S&P China ETF , PowerShares Golden Dragon Halter USX China Portfolio ETF and the Guggenheim China Small Cap Index ETF .

The three Canadian-listed ETFs are BMO China Equity Hedged to CAD Index ETF , Claymore China ETF and iShares China Index Fund . A word of caution. Liquidity in these ETFs is sparse.

On the charts, the Shanghai composite index at 2,244.58 has a negative technical profile with improving prospects. Intermediate trend is down. The index trades below its 50- and 200-day moving averages. Strength relative to the S&P 500 Index has been negative since April. However, momentum indicators for the index are recovering from deeply oversold levels. The index bounced last week from 2,132.63 and has started to show outperformance relative to the S&P 500 at an optimal time for seasonal investing. Preferred strategy is to accumulate ETFs at current or lower prices.



Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/

Follow on Twitter: @EquityClock

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