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China Returns To Business

Over the years, in this blog and in my Investment Strategies newsletter, I’ve written about the direct correlation between the Baltic Dry Index (an index that tracks the shipping of commodities) and growth in China, with the BDI acting as an early indicator of economic activity in China.

I have also recently written about the fact that China curbed its growth via an increase in the value of its currency, the Yuan, and its shut down of factories to ease pollution for the Olympics and Paralympics.

A few days ago, I noted that the Paralympics were ending on October 16th and that China has ended its currency intervention to raise the value of the Yuan, and that this would bring Chinese growth back and demand for commodities would also be returning. Adding fuel to this fire, China has also instituted a $50+ Billion economic stimulus package designed to increase infrastructure growth and employment.

Not coincidently, we’ve had four straight days of increases in the BDI. If you look at the graph above, you’ll see that the timing of the fall in the BDI also coincides with the “end” of the commodity bull market. I’ve said all along that we were in a typical correction, not a new bear market, for commodity stocks. With the turn positive in the BDI, I believe we will see demand increases for energy and metals, followed by stronger stock prices.

I recently told the investment committee of the local Community Foundation that it was likely that the emerging markets, particularly China, would lead the world equity markets to recovery. Many pundits on TV are saying that the recent rally in the value of the dollar indicates that since the US led the world into recession it would lead the world out of recession. That may very well come true, but in terms of equity markets, we still have a long way to work our way out of the financial crisis – so our markets will be facing headwinds longer than the markets that did not participate in the mortgage mess.

Emerging markets and commodity stocks, contrary to popular belief, are less risky than blue chips based upon demand and earnings growth. Yes, they are more volatile, but you will ultimately have strong portfolio returns. Large cap stocks are, as a group, worth less than they were 10 years ago – that is not the way create wealth and retire comfortably.

Mark