If you’re not yet invested in China, you’re going to regret it.
That’s because China is poised to hit the trifecta.
By that, I mean a year when the currency, economy and stock market all do well.
This happened in China in 2006.
Beijing had abandoned the decade-long currency peg to the U.S. dollar in July 2005. The Chinese currency, the yuan, could finally begin to adjust according to market demand. In the first full year that the yuan was free of the peg, it gained 3.3 percent against the U.S. dollar. It would go on to rise a lot more.
(A rising currency is good for foreign stock investors because it boosts their returns in their home currency. For example, US$1 million invested in the Chinese yuan at the start of 2016 was worth US$1,033,000 (assuming all other factors remained constant) by the end of the year.)
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Despite fears of the impact a stronger currency could have on Chinese exports (which grew more expensive relative to the U.S. dollar), China’s economic growth didn’t slow down. Instead, gross domestic product (GDP) growth increased, to 10.7 percent in 2006, from 10.4 percent the previous year.
The same year, the China Securities Regulatory Commission (China’s equivalent of the Securities and Exchange Commission), approved a record 18 applications for its Qualified Foreign Institutional Investor (QFII) programme.
The QFII programme was launched in 2003 as a way for foreign investors to participate in China’s yuan-denominated stock market, which had previously been accessible only to domestic investors.
The QFII programme had a quota – total potential investment permitted – of US$30 billion. That was tiny in the context of the size of China’s stock market. But the 50 percent increase in the number of foreign institutions (from 36 to 54) looking at buying domestic stocks was a big confidence-booster for local investors.
So in 2006, China’s currency was strong. Its economy was growing fast. And foreign investors were focused on the stock market.
That year, the Shanghai Composite Index rose 143 percent in U.S. dollar terms.
Until recently, not many knew about the machinery humming away in these secretive facilities.
But it’s so vital to the future of our economy that 80% of financial companies expect to be using it in the next 24 months. Now investors are scrambling to make big money BEFORE acceptance goes mainstream.
2019 could be a repeat
Last year, China’s stock market fell 25 percent. It was the worst-performing large market in the world.
The U.S.-China trade war, along with concerns over rising interest rates and the potential for a global recession, threw global markets into a tailspin at the end of the year.
So far this year, Chinese stocks are up 27 percent. But I believe they could double this year – like what happened in 2006.
I know that’s a big call. So let me explain why I believe it could happen.
First is the trade war, which is hurting China more than the U.S.
Chinese Vice Premier (the equivalent of a cabinet member in the U.S.) Liu He met with U.S. President Donald Trump early this April. Both sides appear committed to reaching a deal that will benefit everyone.
An agreement that ends the trade war, even if it simply postpones decisions on some key issues, will be bullish for China’s stock market.
But even if a trade agreement isn’t reached, other factors are already helping re-invigorate the world’s second-largest economy.
That includes a new stimulus programme in China.
But unlike the spending-driven stimulus programmes of the past that resulted in enormous waste and problematic debt, today’s programme is designed to generate more sustainable growth.
That includes cutting the reserve requirement ratio (RRR) by 2.5 percentage points.
The RRR is the percentage of total deposits that the nation’s banks are required to keep in reserve and not lend out. The less money that banks have to keep in reserve, the more they can lend – which boosts economic growth.
That amount of reduction in the RRR frees up an estimated US$300 billion, which can be used for new loans. And after a weak December, new loans in January hit a record US$476 billion.
Manufacturing is also picking up. China’s official manufacturing purchasing managers’ index (PMI) rose to 50.5 in March from 49.2 in February, signaling expansion in the important manufacturing sector despite tariffs still in place. (A PMI reading above 50 signals expansion while a reading below 50 indicates contraction.)
Global bank HSBC said in a report last week, “The shape of the stimulus package this time is very different from earlier rounds. We believe that it will not only work, but will also trigger a self-sustained recovery in the coming quarters.”
A strong economy normally results in a stronger currency, which leads me to the Chinese yuan.
It depreciated 11 percent against the U.S. dollar at the height of trade war tensions last year. (See chart below.)
So far this year, it has gained 2.5 percent, despite trade tensions.
As I mentioned earlier, a rising yuan is welcomed by foreign investors, because it boosts their returns when converted back to their own currency.
The yuan has about another 8 percent to go to return to pre-trade war highs. If a trade war deal is reached, the yuan could snap back in a hurry.
But even without a trade war deal, the strengthening Chinese economy will support a steadily rising yuan.
As for the stock market… 27 percent gains so far this year sounds like a lot, but for China it’s just getting warmed up.
Since 2001, every time China’s stock market gained more than 20 percent in a year, the average gains amounted to a staggering 97.8 percent.
That’s happened four times, excluding this year.
So history suggests that China’s stock market has another 65 to 70 percent more to rise in 2019.
The MSCI impact has yet to fully materialise
Last month, I told to you about how MSCI Inc., a global provider of research-based indexes, announced plans to quadruple the weighting of Chinese stocks in its global indexes.
An estimated US$14 trillion of assets are benchmarked to the various MSCI indexes.
The recent hike in China’s weighting in the MSCI indexes is expected to result in as much as US$125 billion of funds flowing into the 448 selected Chinese-listed stocks.
This weighting change is going to happen over three phases (May, August and November). It will act as a steady, rising tide that lifts the Chinese stock market.
This is similar to the QFII programme in 2006, only on a scale four times larger (US$125 billion vs. US$30 billion). So it’s only just beginning.
Last week, JPMorgan Asset Management and Morgan Stanley both concluded that the run-up in Chinese stocks still has room to run.
So while China is four months into its newest bull market, if you don’t own Chinese stocks, it’s not too late.
There are exchange-traded funds that help investors get exposure to a broad range of Chinese-listed stocks. But not every industry will benefit.
A better way to ride the bull market in Chinese stocks is with little-known companies growing sales and profits in the industries most impacted by Beijing’s determination to keep its economy humming along.
In Strategic Wealth Confidential, I’ve found one of these companies. I believe it could soar 400 percent in the next two to three years. To learn more about this incredible opportunity, click here.
Editor, Stansberry Pacific Research