Stocks to Buy: Will China's Bull Run Continue?

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The past three years, from an investment viewpoint, have had many surprises for those trying to decide which stocks to buy.

Perhaps one of the biggest surprises is having one of the world's best performing economies – China – right alongside one of the poorest performing stock markets – Shanghai – over the past three years.

The darkest days were in late November 2012 when the Shanghai index dipped below the 2,000 level for the first time in nearly four years.

But the Shanghai index staged a remarkable turnaround, rallying 23% just since the start of December.

With the beginning of the Chinese New Year – the Year of the Snake – it's a good time to evaluate if this market rally will make Chinese stocks good ones to buy.

Jim Rogers' Take on the "Year of the Snake"

One person that remains a staunch China bull is famed commodities and emerging markets investor, Jim Rogers.

He recently told Yahoo! Finance's Daily Ticker, "In my view, China is going to be the most important country in the 21st century."

But his view is a long-term one. He added that China's rise "is not going to happen overnight or straight up." He predicted many ups and downs for China over the coming years.

What about the Chinese stock market for this year?

All in all, it looks likely that the rally will continue for the foreseeable future.

One reason behind the continuing rally is the fundamentals.

The authorities have unleashed several rounds of both monetary and fiscal stimulus. The valuations of many stocks are among the lowest in the world. Also the Chinese economy is still percolating along. Witness the recent 22.8% rise in industrial profits in China.

But all of that has been true for the past three years. Why the rally now?

One reason was pointed out by Jack Bouroudjian, CEO of fund manager Bull and Bear Partners, to CNBC: the once-every-10-years leadership transition in the ruling Communist party.

Bouroudjian said, "The dust has now settled [on the transition]. We are going to see capital go back to China."

A second reason was pointed out by the Financial Times. It highlighted the fact that the Shanghai and Shenzhen stock markets – the so-called A-shares – are moving from markets once dominated by small retail traders to one dominated by institutions. But the number of new retail accounts opened declined by 50% versus the pace in 2011.

A record number of foreign institutions – 120 – were granted access to the A-share markets by the end of 2012. Most institutional accounts were worth at least $100 million. This led directly to a rise in volumes as institutions began actively trading.

Chinese authorities are pleased with the success and plan to greatly expand its qualified foreign institutional investor program. This is an effort to liberalize not only its capital markets, but also its currency – the renminbi.

If the Financial Times is correct, this is a key long-term change in the mainland Chinese stock market. It bodes well for the future.

Any Chinese Stocks to Buy Now?

The problem with finding Chinese stocks to buy is that the mainland Chinese stock markets are still closed to most investors.

However, for investors that are intrigued by China's potential and particularly the mainland markets, there are a couple of investment alternatives to choose from.

These alternatives differ from a number of China exchange traded funds that purchase mainly stocks that trade on the Hong Kong exchange. Some of these most popular ETFS are the iShares MSCI China Index Fund (NYSE: MCHI) and the SPDR S&P China ETF (NYSE: GXC).

The first investment option is the Market Vectors China A-Shares ETF Trust (NYSE: PEK). It tracks the CSI 300 index of companies listed on the Shanghai and Shenzhen exchanges. It has relatively high weightings in the financials, industrial, materials and consumer sectors.

There is an important qualifier here though. It does not directly own Chinese stocks. The ETF tracks the index by purchasing swaps from Credit Suisse, which can buy Chinese A-shares.

The second investment option is a closed-end fund, the Morgan Stanley China A Share Fund (NYSE: CAF). This fund does actually own A-share stocks since it is a qualified investor. As of December 31, 2012, the fund held 32 securities in its portfolio. The fund has returned roughly 25% over the past three months.

Investors should bear in mind that this fund, like all closed-end funds, may trade at a premium or a discount to the underlying securities in its portfolio. In this case, due to the scarcity of pure plays on Chinese A-shares, this fund trades at about a 5% premium to the value of the stocks it holds.

However, that may be a small price to pay for the ability to actually participate in the A-share markets. Not to mention the avoidance of counterparty risk as of Credit Suisse with the Market Vectors ETF.

Interested in stocks to buy in other foreign markets? Don't miss this look at developed market plays ready to soar in 2013.

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