Despite solid evidence that China is emerging as the world's biggest economic force, with surging growth, dazzling infrastructure and a stirring consumer culture, it isn't hard to be put off as an investor.
Earlier in the decade, the rush into Chinese stocks sent the Shanghai Stock Exchange composite index up some 425 per cent between 2006 and 2007, an absurd spike that looked like a bubble to everyone but those who were buying into it. The index then fell more than 70 per cent by the end of 2008.
Even with the recent recovery in the global economy, the Shanghai index has tumbled about 23 per cent over the past 12 months. Compare that dismal return with the S&P 500: It has risen about 11 per cent, and that's with a backdrop of a shaky U.S. economic recovery, new financial regulations and laughably bad fiscal health.
No wonder Chinese stocks don't generate much excitement these days. But look beyond the Shanghai index and you might see some encouraging signs.
That's because the index tracks domestically traded stocks that aren't even available to foreign investors like us. Years ago, shutting out foreign investors looked like a cruel move on the part of Chinese authorities, as though they stood like bouncers at the doors of a great party.
Now, though, you can thank them. Chinese stocks that trade as American depositary receipts (ADRs) on U.S. exchanges - and are therefore easily accessible to Canadians - have been performing far better than the Shanghai index recently.
A basket of Chinese ADRs has risen about 5 per cent over the past 12 months - a 28-percentage-point improvement over the index. And over the past three years, the ADRs have fallen just 1 per cent, compared with a 40-per cent plunge by the index. (Conveniently, Bank of Montreal now offers an exchange-traded fund that tracks the BNY Mellon China Select ADR index. The ticker is ZCH on the Toronto Stock Exchange.)
These differences are hard to ignore - and, no, currency shifts do not explain them. Instead, many ADRs represent a small, rather elite, slice of the Chinese equity market. They tend to be renowned names with strong growth prospects, like China Mobile Ltd. and PetroChina Co. Ltd., rather than flimsy fly-by-night operations. And, in cases like Baidu, Inc., some have no counterparts trading in China.
In other words, why go to China for Chinese stocks? The best ones are closer to home.
David Berman