Sell China Before Buying It Again

11/19/2007 12:00 am EST

Focus: GLOBAL

Robert Hsu

Editor, China Strategy and Asia Edge

Robert Hsu, editor of China Strategy, says Chinese stocks have had a big run and it may be time to take profits before seeking out new opportunities.

My mood is a bit dampened by the recent action in the US markets. The combination of lackluster third-quarter earnings in the US, the falling US dollar, $100 crude oil, and the cancellation of the Chinese pilot program [to allow Mainland Chinese investors to buy shares in Hong Kong] makes me increasingly cautious about where the markets are headed from here.

I'm beginning to suspect that the huge run we've enjoyed over the past three months is slowing and that we'll have to be a bit more alert and opportunistic in our strategy. We should be prepared to take profits in companies that have had nice run-ups in order to protect our gains-even though these companies are still dominant players in their respective industries. If we sell, we may very well come back to these companies again at attractive prices when the market seems a bit more stable and ready for its next move higher.

I don't want you to panic on the news that we may sell a few positions in the coming weeks and months.  [Two weeks ago], I told you in a Flash Alert to sell two stocks because I was afraid that their momentum was shifting due to the Chinese government's decision to indefinitely postpone its initiative allowing Mainland Chinese investors to invest directly in Hong Kong-listed stocks.

So, if you haven't done so already, I want you to sell China Aluminum (NYSE: ACH) and Huaneng Power (NYSE: HNP), as well as half your positions in Sinopec (NYSE: SNP), CNOOC (NYSE: CEO), China Mobile (NYSE: CHL), and China Life (NYSE: LFC). These last three positions are more likely to hold up through the current market situation, but I want you to decrease your exposure in these companies and preserve your capital so that you can be prepared to redeploy it at much better prices.

Now I'd like to share some good news that's helping push our stocks higher despite otherwise tough market conditions. Even though the Chinese government is discouraging individuals from investing directly in Hong Kong, it's still pushing forward with its institutional plan to allow Chinese mutual funds to invest abroad.

Most interesting to us as China Strategy investors is that some of these new funds are allowed to by Chinese stocks listed here in the United States! Now, Chinese citizens, through mutual funds, will be able to buy our US ADRs of Chinese companies. I expect that our next profit opportunities will come from Chinese Internet and solar sectors over the next two months.

Once again, China has given us an opportunity to continue to make money even in the face of a declining US market. This is why, though we'll be cautious, we'll continue to invest in companies that are profiting from the China Miracle.

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