Tuesday, May 05, 2009

China PMI

It is remarkable how far we have come in the U.S. equity markets. There was a time when investors were barely tuned into the gauge for sentiment among U.S. purchasing managers. This week the most recent measure of the Chinese equivalent sent boosted sentiment and sent U.S.-listed stocks higher in enthusiastic trading.

The CLSA China Purchasing Managers Index rose sharply to 50.4 this month from 44.8 just one month ago and a historic low of 38.8 in November 2008. The survey provides insight into purchasing behavior of decision makers. Increases suggest rising confidence in business prospects.

This year we have temper our excitement by the knowledge that China’s economic stimulus is just working its way through the retail markets. China’s Central Government is putting “a washing machine and dryer in every home.” Logically to meet this domestic demand, producers need to order raw materials and components. The question is then whether the upsurge in activity is temporary or if the order flow will be sufficient to put people back to work and keep the demand going.

Crystal Equity Research has been looking quite closely at Chinese investment opportunities, particularly the small operations listed in the U.S. Our logic is that financial reports in U.S. GAAP make due diligence at least a bit easier. We also prefer the infrastructure and energy innovators, avoiding the retail sectors and the difficult questions about consumer demand. It is very clear that energy conservation and alternative fuel sources are a high priority for the Chinese government. This leaves most of the stock selection to finding the best management, the best operations know-how and the best technologies.

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