ETFs for Rising Consumption and Manufacturing Activity in China

NEW YORK (ETF Expert) -- There are scores of erroneous beliefs that mislead the investing public. However, few are as dangerous to one's portfolio as the notion that economic growth correlates to stock market performance.

Consider the inglorious ride for Chinese equities via SPDR S&P China ( GXC). In 2010, China's GDP growth rate topped 10%, while GXC managed a modest total return of 7.5%. The S&P 500 SPDR Trust ( SPY) garnered double-digit percentage gains in spite of sub-par GDP.

In 2011, China's GDP still grew at a relatively robust 9.5%, but that didn't stop GXC from registering an abysmal -16.7%. Even with a disappointing total return of 2%, SPY outperformed without substantive economic growth to go with it.

In 2012, GXC bounced back considerably, powering ahead with a total return of 23%. Not only was this better than SPY, but it occurred in spite of a troubling economic slowdown whereby GDP finished below 8%.

Of course, most of the 2012 gains for GXC came on the heels of a three-month super-spurt. The manufacturing sector shifted from contraction to expansion, and has held firm over the last three readings.

Moreover, after seven consecutive quarters of declining quarterly GDP rates, the fourth quarter of 2012 picked up considerably. Better yet, the Chinese economy is expected to recover and grow above 8% in 2013.

The rocky road for Chinese stocks teaches us that stocks respond not to the growth rate itself, but the directionality, or the trend, of economic activity. China's economic growth rate drifted lower for several years with little stimulus by its banking authorities: 10% to 9% to 7.5% is far more troublesome for folks than a steady, but paltry 2%, in the United States.

Indeed, the evidence is pointing to a winning hand for investors in Chinese equities. Not only is GDP finally trending upward, but leaders have more boldly expressed a willingness to employ monetary/fiscal stimulus to support a 7.5% growth rate. (They're likely to see north of 8% without stimulative measures.)

With a variety of benchmark indexes offering forward P/Es of nine to 10, stocks tied to China look better than they have in years.

While there are those who may view exchange-traded favorites like GXC and iShares FTSE China 25 ( FXI) as lower risk assets due to their diversification, I tend to favor trading partners in the Asia-Pacific region.

If you're intrigued by the manufacturing angle, iShares MSCI Australia ( EWA) beckons as one of China's most important providers of materials. (Also, you shouldn't shake a stick at that 4.1% SEC distribution yield.)

South Korea, as represented by the iShares MSCI South Korea Index ( EWY), is another key trading partner with China. Whereas the U.S. and Europe import a staggering amount of goods/services from the mainland, Korea, the fifth largest trading partner, is a net exporter.

For believers in the idea that China is in the process of transitioning to a powerful consumer class, EWY is a solid ETF in the Asian neighborhood.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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