Shanghai Surprised

07/30/2009 11:42 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Shanghai stocks down 5% overnight. Commodity prices in broad retreat. Deutsche Bank (Frankfurt: DBK.DE; NYSE: DB) discounted 11% after doubling loan-loss provisions from the prior quarter.

The headlines hearken back to the nail-biting days and nights from the winter of investor discontent. Happily, the cuticles have now grown back and a few have even scratched out impressive returns from the March bottom.

The sharp correction in Shanghai trimmed the Chinese market's year-to-date gain to 79%. Deutsche Bank shares have nearly tripled from January's low; despite the hand wringing over the higher loss reserves, profit surpassed expectations. And the commodity complex has certainly had its moments, and may have one or two more up its sleeve. Most global markets remain at or near the year's highs. Many are up more than 10% over the last ten trading sessions.

Despite deflating some, Shanghai still managed to lift the $7.3-billion China State Construction IPO 56% in its trading debut. This despite the misgivings, previewed last week in this space, that Beijing now thinks the rally has gone far enough, for now. Many skeptics believe China's already inside a bubble, based on a market price/earnings multiple more than double Russia's or Brazil's. Others retort that China's cheaper than it has been in the past. And many Chinese stocks continue to display attractive fundamentals.

Of course, it's easy to do well when money seems to grow on trees—just ask Lehman Brothers and Countrywide Financial. There are indications that Beijing is about to rein in its bankers—the same ones who, at the government's behest, have been approving loans with alarming alacrity in recent months. In contrast, European lenders have been dispensing credit with an eye dropper for a while now. If there's solace to be had from the latest EU lending survey, it's that fewer banks (only half as many, in fact) are tightening their purse strings than were doing so earlier this year.

It may be that each set of pinstriped suits is only doing what local conditions demand. Certainly, China's aggressive monetary easing has not gone unnoticed by Weldon's Money Monitor publisher Gregory Weldon. He does note, though, that Beijing's easy-money stance makes some sense in light of rising bank deposits and gradually recovering exports to the US.

This week's investment picks are anti-Chinas in the sense that they're about as unglamorous as successful ventures can get. ATS Automation Tooling (TSX: ATA) supplies custom-designed industrial assemblies, a broad range of other manufacturing gizmos and, more recently, photovoltaics, though this venture into alternative energy hasn't quite panned out as planned. Despite the global manufacturing downturn, the company has recently reported improving fundamentals, write Benj Gallander and Ben Stadelmann of Contra the Heard.

Meanwhile, Gartmore Global (LSE: GGL), is a UK-based trust that has outperformed most competitors by bucking tides of fashion—and the steady outflow of institutional money not merited by the results. Lately, its success has been reflected in the narrowing of the trust's discount to net asset value. But should that spread widen again, the fund has a plan in place to buy its own shares, writes Andrew McHattie in the Investment Trust Newsletter.

These aren't the sexiest of global plays. But their proven ability to persevere should serve them well over the long run. 

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