Top China Stock Pick 2007
iShares FTSE/Xinhua China 25 Index Best Chinese Investment
Self-proclaimed gurus predict a meltdown for Chinese investments in 2007. The facts about this superlative Chinese equity fund tell a far different story.
In mid-June 2006 when we first wrote about iShares FTSE/Xinhua China 25 Index, a Chinese Exchange Traded Fund (ETF) that trades on the New York Stock Exchange under the symbol FXI. At that time, FXI's unit price was US$65.50. Six months later, FXI soared 80% to $118.
By January 10, 2007 FXI had dropped almost 20% to $98.20 in just one week.
Loosely-called stock experts now loudly associate the Chinese stock market with the "irrational exuberance" last seen at the height of the 1990s dot.com bubble.
Chinese Stock Market "Too Rich"
In the BusinessWeek.com article Stocks: The Chinese Correction?, chief technical strategist Mark Arbeter labels FXI speculative, scary, overbought and due for a major price drop.
Let's stay analytical.
First, Arbeter notes that FXI's trading volume has soared recently, jumping 4.6 times from its daily average of about 800,000 in June 2006 to 3.7 million on January 3, 2007 when FXI hit its high. Yet the volume for the NYSE Group (NYX on NYSE) has risen over 7 times from its daily average of 1.7 million in July 2006 to a daily high of 14 million units on January 5, 2007. Arbeter also points to the fact that FXI's price has spiked by over 26% since November 28 and by 13.5% since December 21 as proof of mass speculation. Again, the NYSE Group at $108 on January 9 has increased by over 30% since November 9 and by 17.8% since January 4.
Arbeter then articulates his "educated guess" that FXI buyers know nothing about the Chinese companies in the ETF fund. According to Yahoo! Finance, institutional researchers hold about 60% of FXI shares. Our June 2006 article on top Chinese investment picks that describes FXI continues to garner more than 200 page views per month.
And The Winner Is...
With 92.5% of its portfolio invested in 25 of China's largest and most liquid companies, FXI is well-positioned to benefit from China's emergence as a dominant force in global trade.
So far in 2007, Chinese investments in general and FXI in particular have provided a roller-coaster ride of share prices. But even here, seasoned market watchers understand that such volatility is common as the market digests the latest spate of news mixed with uncertainty.
The volatility in fact offers opportunities to buy FXI in "bite-size" instalments over time, diversifying purchases so as not to tie up total assets at one price. So a total of US$10,000 could be broken into four separate purchases of $2,500 to lower the average stock costs.
Sources: Yahoo! Finance, BusinessWeek.com Technical Market Insight (January 8, 2007), MarketWatch IPO Report on China Life (January 9, 2007), Forbes.com Market Scan China Acts To Deflate Stock Bubble (January 9, 2007), StreetAuthority Top Ten Stocks For 2007
