China's Promising Energy Sector

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- China continues to be one of the world's most complicated investment destinations. On one hand it is a financial house of cards with a bigger housing bubble than the U.S. and on the other hand it is on its way to dominating the world economic order (if it doesn't already).

What we do know with certainty is that since the peak in the S&P 500 in 2007 the Shanghai Composite is down 60% and the Hang Seng Index is down 30% while the U.S. is down only 20%. Year to date in 2011, both markets are down 20% versus a flat year for the S&P 500.

After such a long period of underperforming it is reasonable to wonder whether China might be due to outperform again. If so, there are certain sectors to consider and certain sectors to avoid. Clearly the Chinese financials carry the greatest risk. If concerns about too much lending play out as some believe then the banks would be take the full brunt of those consequences.

In considering China I would be more interested in areas where demand remains healthy and one such sector is energy and one way to capture the sector in China is the Global X China Energy ETF ( CHIE).

Over the last year as Shanghai and Hong went down 20%, CHIE went down 15%. Demand for oil has been increasing slowly and steadily in China; seven years ago per capita consumption was slightly more than one barrel and now it is around two barrels and this slow trend should continue as more Chinese move to urban settings and access more of a middle class lifestyle that among other things includes a car. The economy will have its ups and downs but the aspirational demand won't.

CHIE is heaviest is Chinese oil majors like Sinopec (SNP), Petrochina ( PTR) and CNOOC ( CEO).

Also featured in the fund are coal companies like China Shenhua Energy (CSUAY). Those four account for 40% of the fund. The biggest drawback to the fund's composition is the 10% weighting to solar stocks. The largest solar stock in the fund is GCL Poly Energy Holdings which is down 23% on the year but amazingly is down 60% from its May high.

Solar stocks in general are down a lot and while there is not much of a catalyst to propel them higher they very well may have bottomed out and so far less of a drag on the fund in the future.

The thesis for energy stocks doing well even with questions about debt loads and economic hard landings is supported by how some of the individual energy stocks have performed in 2011; SNP up 11%, CSUAY up 6% and PTR down only 7%.

Investing in China is going to remain complicated but the long term trends in lifestyle quality speak well for the future of the country's energy sector.

At the time of publication, Roger Nusbaum did not hold positions in any equities mentioned.

Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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