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Chinese Equities End Year with a Bang

Chinese equities surged by 15% in December, helping the market eke out a small gain for the year after experiencing earlier declines

Lee Davidson 4 January, 2013 | 11:13AM

Chinese Equities Finish Strong

After a disappointing run throughout most of 2012, Chinese equities ended the year with a bang. From January through November of last year, Chinese A-shares as measured by the CSI300 index declined by 11.4%, but with a 15% surge in December, Chinese equities managed to finish the year with a 2.8% calendar year return. While the December surge in Chinese equities was substantial in its own right, the Chinese stock market nonetheless wound up as one of the year’s worst performers globally. For the year, the MSCI World Index--a broad barometer of developed market equities--managed to climb by 13.3%.

With a 15% surge in December, Chinese equities managed to finish the year with a 2.8% calendar year return

Several factors contributed to the buying frenzy in Chinese A-shares in December. First, economic data surprised on the upside with growth accelerating in China’s manufacturing sectors, as told by the HSBC Purchasing Managers’ Index (PMI). In December, China’s PMI score rose unexpectedly to 51.5 from 50.5 in the prior month, reaching the highest level since mid-2011. A reading above 50 indicates an expansion of output. Panelists in the widely-cited survey noted that increasing order volumes were indicative of renewed client demand for Chinese manufactured products. However, much of this increase in new orders was driven by domestic forces as new export orders have fallen off since November.

PMI readings in the service sector were also resoundingly positive, coming in at 56.1 in December after a reading of 55.6 in November. Commenting on the developments, Hongbing Qu, chief economist at HSBC, stated that, “Beijing’s reiteration of keeping pro-growth policy in place into the coming year, should support a modest growth recovery.”

Investing in Chinese Equities with ETFs

While many investors have historically been unable to invest in China A-shares directly, exchange-traded funds (ETF) have broken down these barriers. db X-trackers CSI300 Index ETF (XCHA) tracks the broadest market capitalisation weighted benchmark of Chinese A-Shares and is available on the London Stock Exchange, while other derivations are available in Luxembourg or Hong Kong. Indeed, these products turned out to the best performing ETFs for the month of December.

Silver Slump Could Create Buying Opportunity

On the other end of the investment spectrum, silver was trounced in December, falling by 14%. There are no universally agreed upon explanations as to why silver prices fell so sharply.

Typically, silver and gold are treated as stores of value in times of turbulence and are buoyed when governments take any action perceived to be inflationary. In December, announcements of pending inflationary actions proliferated. In the US, the Fed’s new quantitative easing program was announced, with the Federal Reserve stating it plans to buy $85 billion worth of mortgage-backed securities and longer-dated Treasuries each month until expected inflation reaches 2.5% or unemployment falls to 6.5%. Furthermore, Shinzo Abe, the newly elected Prime Minister of Japan, has promised aggressive monetary easing, going so far as to the call the policy ‘unlimited’ in an effort to fend off deflation and increase public spending.

Under such circumstances, it was peculiar to find silver prices plunging, though many investors now see this as a buying opportunity.

Silver exchange-traded products (ETP) are quite ubiquitous in Europe and on the London Stock Exchange. When choosing a silver ETP, Morningstar’s Director of Passive Funds research Ben Johnson states that “TER, custody and storage fees (in aggregate, carrying costs) are key differentiating factors for physical metals funds--with lower TERs and fees obviously being better for investors.”

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About Author Lee Davidson

Lee Davidson  is an ETF analyst with Morningstar Europe.