A China Comeback? 3 Clues to Decode This Investing Mystery

Rudy Martin

Last week I admitted my addiction to computers. Today I have another confession: I like mystery stories. The medium doesn’t matter — I enjoy novels (on my tablet, of course), TV and movies equally.

Finding the subtle clues other conventional investigators missed is the fun part for me. Maybe this is why I also enjoy finding great investment ideas.

Sometimes I feel like one of those offbeat investigators as I look for small, seemingly insignificant clues that unlock the truth.

Right now, I’m investigating an international mystery — and I have a prime suspect.

Clues Around The Globe!

Many once-healthy emerging market stocks disappointed investors the last two years. The downturn worsened the last few months.

When a big market like this one falls, investors should pay attention. Downturns eventually turn into bargains — and they may be good investment candidates for my Global Trend Trader subscribers.

China is the largest and most-important emerging market country. In my opinion, most Chinese stocks are not compelling yet — but I see some encouraging signs.

Three recent developments caught my attention. Let’s see what these clues tell us.

CLUE #1: INDUSTRIAL GROWTH RESUMING

While Americans enjoyed Labor Day, Chinese authorities released some important data. The key gauge of China’s manufacturing sector hit a 16-month high in August.

Behind the strength: Factories are getting new orders and overseas demand is rebounding. The China Purchasing Managers’ Index rose to 51.0, signaling higher manufacturing activity.

Another announcement showed a 53.9 reading in China’s non-manufacturing PMI. This was down slightly from July, but still confirms underlying economic strength. (A PMI score above 50 means expansion, exactly 50 is neutral, and below 50 indicates a contraction.)

Even better, China is beginning to generate its own growth. A Hong Kong-based economist from Bank of America reported seeing both jumping exports and domestic demand in the data.

CLUE #2: EXPORT CUSTOMERS BACK ON THEIR FEET

Exports are still critical for China. Europe’s slumping economy hammered demand for Chinese goods. Now Europe shows some signs of life.

Except for socialist-led France, European PMI figures are beginning to show indications of growth.

Euro-zone overall PMI edged up to 51.4 in August from a slightly positive 50.3 a month earlier. Production, new orders and new exports all accelerated at the fastest rates since May 2011.

Looking at particular countries tells us more:

  • In hard-hit Greece, PMI is still contracting but improved to a 44-month high of 48.7, almost neutral.
  • In Italy, PMI hit a 27-month high of 51.3 in August.
  • In Spain, a pickup in export orders boosted PMI out of the red zone to 51.1.
  • The UK’s robust expansion boosted PMI to 57.2 from July’s reading of 54.8.
  • Germany continued to show manufacturing growth.

Here in the U.S., the Commerce Department revised its second-quarter GDP estimate higher. The initially sluggish 1.7% gave way to a livelier 2.5% annual pace.

The economy still has plenty of problems, but this GDP number is much better than our lackluster 1.1% growth rate in this year’s first quarter.

Growth in Europe and the U.S. will help Chinese exports — but we still have one more clue.

CLUE #3: CHINESE CORRUPTION CRACKDOWN

"One would believe, because China has four times as many people as the U.S., for every American Steve Jobs, China should have four. But we don’t. We don’t have a single Steve Jobs."

That’s what Lee Kai-Fu — a Beijing-based IT venture capitalist who formerly headed Google’s China unit — said in a recent interview.

China’s rampant political corruption neutralizes the benefits that visionary Chinese business leaders could give their country. Any improvement will make a big difference. China’s new president, Xi Jinping, has campaigned against corruption while promoting market economic reforms.

Premier Li Keqiang, a Ph.D. economist, also sees the problem. Export customers stop buying impure food products. Buildings that collapse in earthquakes because inspectors were bribed don’t help the economy. Authorities are starting to crack down on corruption.

One very visible example was ousted Politburo member Bo Xila’s public corruption trial. Seeing a top official tried for bribery, embezzlement and abuse of power made an impression on lower-ranked bureaucrats.

China is also sweeping up foreign firms who make illegal payoffs. Three pharmaceutical giants are in the crosshairs.

  • GlaxoSmithKline (GSK) allegedly bribed doctors with money and sex so they would prescribe more of its drugs.
  • Chinese authorities visited a Novo Nordisk (NVO) facility last month and charges could come soon.
  • France’s Sanofi (SNY) is reportedly under investigation for bribing more than 500 physicians in 2007.

IS CHINA COMING BACK?

I’m watching all these developments as I look for other Chinese recovery clues. If you are a global-minded investor, keep your eye on stocks that can exploit China’s accelerating economic growth.

My Global Trend Trader model already holds a consumer electronics firm and a major automotive company that can capitalize on China’s growing affluent and middle-class consumer classes.

We also have a stock with "back door" exposure to China’s industrial growth. We know the recovery will require raw materials, but it isn’t clear which particular ones. China imports copper, iron ore, coal, rare minerals, hydrocarbons and more.

Banks in the winning countries always seem to prosper, too. That’s why I recommended a top bank in one of the leading resource-rich nations. A Chinese industrial pickup will lead directly to more business for this bank.

This Chinese mystery’s author is still working on the final chapters — but you can bet Chief Inspector Rudy Martin will stay on the case!

Good luck and happy trading!

Rudy Martin

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