Jul 09 2008
This Inflation Buster Could Turn into a Pay Day
Two Asian newspapers revealed that China’s fight against inflation could pay off in the immediate future. If so, the SSE Composite Index (Shanghai: 000001.SS) Shanghai is the place for you to be.
Both The Shanghai Daily and The Standard reported that as early as this week the Chinese government could issue new numbers to show it has finally reined in inflation. The news could send the Shanghai Composite Index back up. In fact, in our June 11 issue, we thought it was a good idea to double down on the index while it was still in a trough.
The Asian newspapers quoted the Industrial and Commercial Bank of China as saying that the country’s inflation could peak in 2009 and then decline.
While the bank also predicted that stock markets could continue to suffer through 2011, our guess is that any government reporting good inflation numbers has got to be considered a superstar.
Here in the U.S. and abroad, inflation has been destroying economies and the markets. Coupled with the credit crunch from the subprime meltdown, tight money and the rising cost of living have emptied consumers’ pockets.
The news yesterday in China caused the mainland stock exchanges to rebound by nearly 5%. The Shanghai Composite Index bolted to an intraday high of 2,801 points in the morning before easing to close at 2,792 — up 4.59% from Friday.
Whether or not that’s a short-term blip remains to be seen. Even if the SSE drops again, this could prove to be a solid long-term investment — let’s say over the next 24 months.
China is expected to release its macroeconomic statistics for last month next Thursday. Economists expect the inflation rate could come in at 7.1% versus 7.8% in May.
In the flurry of news, Bloomberg quoted Liu Yang, managing director at Hong Kong-based Atlantis Investment Management Ltd.: “Fundamentals are very strong in China compared to any other Asian nation. Chinese stocks are trading at crisis valuations. Do they deserve to trade at crisis valuations? The answer is no. The market deserves a very good rebound from here.”
Food prices in China have been a major inflationary catalyst (sounds familiar). China’s consumer price index (CPI) showed food inflation had eased to 19.9% in the year to May from April’s 22.1 percent pace, according to the national Bureau of Statistics.
Certainly food is not enough by itself to control inflation in China. But at the same time, the lower prices have boosted investor sentiment, which is critical to a positive market reaction.
We’re not quite certain if this is the time to get into the Shanghai Composite Index. It might be a tad early. However, if you feel uncomfortable with the risk at least keep an eye on the index. The trading symbol is 000001.SS.
–Irwin Greenstein
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