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It's something of an open secret that the current bull run in stocks is driven by government intervention, the promise of more intervention, and legions of new investors coming in from the sidelines.
The central bank and the administration want stocks to go higher, so, in terms of stimulus, they've opened the floodgates a tad. The result? One of the major indexes has soared 32% on average since March.
That's one of the greatest "reality gaps" of all time - one of the richest, fastest gains in modern history, and all amid a global pandemic and widespread economic devastation.
To be clear, I'm talking about China, though it's perfectly understandable if you thought for a minute I was talking about the United States.
For all of the tense rhetoric currently flying back and forth between D.C. and Beijing, the parallels are really striking.
More to the point, they're really profitable.
If you look at China's market, and the U.S. market - where stocks have zoomed an average of roughly 47% under broadly (though by no means specifically) similar conditions, you expand your profit opportunities immediately. A lot of U.S. investors are missing the boat here, shutting themselves off from double-digit upside. That's a shame, because it's never been easier for Americans to own the best companies in China.
You don't have to worry about benefitting at America's expense, either. Far from it, in fact, with these four stocks...
China Just Ordered a Bull Market
Here in the United States, we have "capitalization-weighted" indexes, like the S&P 500 and NASDAQ Composite.
Well, there's one for China, too - and it's pretty big. The CSI 300 tracks the performance of the 300 largest companies traded in Shanghai and Shenzhen, and it's been on something of a tear recently.
On July 6, it surged by 5.7%, the biggest one-day gain since November 2015. The index rose 14% the week prior.
Chinese markets, much like American ones, have been bullish all summer, but this extra jolt on Monday came from front-page editorial in the China Securities Journal.
It said China is attracting foreign capital, and the result will be a "healthy bull market" that will help the country "breed new opportunities in crisis and break new ground in a changing world."
On its own, an editorial talking up stock markets doesn't mean much. But remember that in China, most of the media is, at a minimum, overseen by the government if not run outright by it.
The China Securities Journal, for example, is completely government-run, so this editorial was widely taken as a sign that the government wants the bull market in Chinese stocks to continue and get even bigger.
And in China, what the government wants, the government usually gets.
So far, China's government has issued some stimulus to get its economy going again, but nothing of the size or scope that we've seen in Europe and here in the United States. China's stimulus is around $700 billion compared to the U.S.'s nearly $3 trillion and the European Union's $750 billion stimulus packages.
This new ultra-bullish messaging from state media is making traders think the government has their back, and stimulus will come if needed.
And, like I said, in parallel with what we've seen here in America, the amount of new brokerage accounts being opened is rising. Daily stock market turnover is above $143 billion, and Chinese tech stocks are up 44% for the year.
You could be forgiven for thinking the similarities between U.S. and Chinese markets are almost eerie.
The last time the Chinese government had the media calling for a bull market, Chinese stocks doubled in six months.
Of course, it ended in tears. In 2014 and 2015, Chinese media were similarly hyping up stocks, and individual investors in particular responded by opening accounts, trading on margin loans, and increasing daily stock turnover.
But as interest rates and rules on margin loans started tightening, the Chinese stock market crashed. The pain was drawn out, too. From May to August, Chinese stock indexes dropped by 40% and then fell again later in the year.
Now, it could very well happen again - it's hard to say what will happen in the global "COVID markets."
But for now, the trajectory of stocks and stimulus looks very different. As I said a moment ago, Chinese central bankers have deployed just a fraction of the "ammo" they have available.
Plus, there's plenty more money that'll work its way into the markets from investors, too...
Investors Have Plenty of Dry Powder
On a virtually global basis, with bond yields and bank interest rates both practically at zero, stocks are the only place where money can grow.
Money goes where it's treated best, so that's where all that money will end up. I know this because I track the daily motion of some of the biggest, most important assets in the world for my Dark Edge Project subscribers - cash, metals, stocks, bonds, commodities, and more - so I can develop trading research recommendations I think will help my subscribers make money. (You can go right here to learn more about how to get my Dark Edge Project research.)
Importantly, my Dark Edge screen shows me that that money hasn't all moved yet: The amount of money held in cash all over the world is actually higher today than it was before the pandemic. In the United States alone, the saving rate in April jumped to 44%, up from an average of 7.9% last year.
That's despite the fact that stock markets have surged since late March. Clearly, there is still money sitting on the sidelines, waiting to get in.
As that money trickles into stocks, from Shreveport to Shenzhen, it will keep the rally going in the short and medium term. It's monetary "physics."
Now, plenty of U.S. investors might have reservations about owning Chinese shares at such a tense moment in our bilateral relations. And there are plenty of legitimate points of disagreement and outright wrongs there.
But the truth is our economies are much more intertwined than Big Media and Big Government would tell you. Contrary to what you might hear or read in the news, U.S.-China economic relations are not a strictly win-lose, zero-sum affair, but a complex system that has benefits and costs for both countries.
Public Citizen has tracked Chinese investment in the United States and found investments in 40 states worth more than $145 billion as of 2016. China is seeking American technology and know-how to upgrade its own infrastructure and vouchsafe its rapid growth.
To be clear: Chinese industrial espionage is a real, expensive problem, but the numbers suggest much of the high-tech back-and-forth is paid for up front. That's money that goes to American businesses and pays the salaries of American workers.
Foreign-owned firms employed 6.8 million American workers in 2015. U.K.-based firms employ the biggest chunk of those, around 1.1 million workers. But the number of Americans employed by Chinese-owned firms is seeing the fastest growth. That cohort is small, but significant, sitting at around 44,000 workers. - and represents a 30-fold increase from 2007.
With that said, I think several of China's big-caps deserve a place in every American investor's portfolio. You can limit your exposure to a small basket of four stocks, giving you all the upside potential with little of the downside risk.
Every single one of the shares I'm going to recommend trade on major U.S. exchanges, most via American depositary receipts (ADRs), which are certificates a foreign company places on deposit at a U.S. bank to facilitate trading on U.S. markets. In practice, this makes it just as easy to buy these foreign companies as it is to buy American firms.
And these are the companies to buy...
Add Some BATs (and More) to Your FAANGs
Of course, much like we have the big FAANG stocks in the United States, China's powerhouse tech stocks are collectively known as the BATs - Baidu Inc. ADR (NASDAQ: BIDU), Alibaba Group Holding Ltd. (NYSE: BABA), and Tencent Holdings ADR (OTC: TCEHY).
Alibaba broke records when it held its IPO five years ago, and, as my colleague Bill Patalon likes to say, it's a "single-stock wealth machine." Its singular, dominating position at the apex of China's monster e-commerce market makes it a must-own. Will this one to your grandkids, too. While it's soared as high as 20% this year, it's given up a little ground recently. Investors should read that as "It's on sale now."
Baidu and Tencent are the "other two" China tech stocks to own, to round out your profit potential in the Internet search segment, artificial intelligence, e-commerce, and even entertainment, too. These are Chinese companies, but just like Google and Microsoft, they're growing to have a truly global footprint. Add to your positions on any pullback.
My favorite stock right now actually isn't one of the proper BATs, (though it's partly owned by the aforementioned Tencent), but it makes a great addition to your global holdings.
I'm talking about JD.com Inc. (NASDAQ: JD). JD.com is one of the Fortune Global 500. It's an online "mall" of sorts, much like Alibaba's main business, where consumers can buy directly from businesses with virtual storefronts there. Chinese consumers are an unstoppable, rising force right now, and their increasingly voracious shopping habits will push JD.com, Alibaba, and other "e-tailers" to dizzying heights.
Plus, JD.com is Alibaba's main competitor in online commerce, making it my favorite China stock play. It's spiking today, as well, but look for any pullback to add this to your short- to intermediate-term portfolio.
These four stocks will get you all the exposure you need to the world's second largest economy, and should signs of a stock bubble begin to emerge in China, a simple tightening-up of your stops should offer you all the protection you need. If my hunch is correct, you'll have taken your principal and most of your profits off the table long, long before that happens.
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About the Author
D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.