October 2, 2024
Enter the Dragon
Dear Subscriber,
Editor’s note: In less than a week, we’ll host one of the most important investor events of the year — The Great Income Solution Summit. If you worry about wages, finding investment income and retirement, you aren’t alone. And on Tuesday, Oct. 8 at 2 p.m. Eastern, you’ll want to tune in. You can reserve your free ticket here.
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| By Sean Brodrick |
American investors ignored the China stock market for a long time. I can’t blame them.
At the start of the year, China’s broad stock index was down nearly 60% from its early 2021 high. And a rally into May was met with more selling.
The China market looked dead … until it wasn’t.
Suddenly, in a couple of weeks, China’s stocks caught fire! But there’s still a long way to go — and that presents an opportunity for investors.
Still, Wall Street is mostly ignoring it. That helps you get in ahead of the white-shoe crowd.
So, what happened?
Billions of Dollars Happened, That’s What
China’s central bank started firing the money cannons!
The People’s Bank of China unveiled stimulus valued between $142 billion and $284 billion. Very quickly, the PBoC …
- Rolled out $142 billion for new lending by cutting banks’ reserve requirements.
- Lowered a key interest rate and reduced one-year borrowing costs.
- Offered relief for homeowners, with lower mortgage rates and lower minimum deposits on homes.
- Literally threw money at the stock market. This is wild … the PBoC offered $71 billion to big players to buy stocks and another $43 billion to fund corporate share buybacks.
Why is China’s government doing this? Well, the economy there is going from bad to worse. Just look at the “new orders” component of the recently released China Manufacturing PMI for September …
That plunge to 47.5 in September isn’t just a decline, that’s nearly a collapse!
And that’s not all. China has seen sharp declines in M2 money supply, residential starts, commercial and residential property prices, consumer confidence and more.
So, China decided it had to do something. Wall Street’s response has been tepid because they think a stimulus-fueled rally will fail. After all, it won’t spark real demand.
I think such people are kidding themselves. The U.S. market and economy have historically responded well to stimulus. Why shouldn’t China?
Indeed, big government stimulus programs triggered three of the last five big rallies in China since 2005.
One thing to keep in mind is that the previous stimulus in China saw multiple rounds of cash. The direct market support by the PBoC is off to a fine start. But it could easily triple!
So, how can you play this?
One example is the iShares China Large-Cap ETF (FXI). It has an expense ratio of 0.74% and a dividend yield of 2.61%. Just look at this weekly chart …
You can see that FXI has been testing its high since early last year. I believe there will be more stimulus, which will cause FXI to break out and head to its old high, around 50. Maybe higher.
The FXI surged in the past couple of weeks. If you play the market short term, you might want to wait for a pullback.
But FXI pays a solid (for this market) dividend yield — basically paying you to stay. And if your eye is on the longer term, you can buy now and wait to see the China dragon rip higher.
All the best,
Sean
P.S. The FXI pays 2.6% in dividends. While that’s twice what the average S&P 500 stock pays, let’s face it … it’s not enough. If you want to see how to get enough, reserve your seat at the upcoming Great Income Summit here.
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