The host of the 2008 Summer Olympic Games has been quiet since the late August closing ceremonies, but China’s finally making some noise with a much-needed stimulus plan. And those interest-rate cuts and the billions of dollars poured into ailing industries will help more than just the Middle Kingdom. The rest of the world will get a boost, too.
That’s because China’s the driver of global growth, Cramer said during Tuesday’s Mad Money. Cyclical stocks, especially the infrastructure names, have been rallying specifically because of China’s stimulus. It’s not like there’s been other good news for the markets that would have sent this sector higher. Not with the U.S.’s own stimulus plan seeming to be a mix of unemployment-benefits extensions and handouts to states.
So now there’s reason to be excited about the markets. China’s recovery is causing a massive shift away from consumer-products companies like Merck and McDonald’s – classic recession plays – and into industrial and mineral stocks like BHP Billiton, Joy Global and Freeport-McMoRan – early-cycle names. Some on Wall Street say this sector rotation is due to rising commodity prices and declining mortgage rates. But China’s demand is the reason for those higher prices, Cramer said, and mortgage rates haven’t yet fallen as low as they most likely will. So the bull behind this trend, one that should filter out to the rest of the world, is actually a panda bear.
What is China doing? How about cutting interest rates five times in less than four months. And Beijing has signaled it’s willing to cut another two or three percentage points in the future. (The U.S. doesn’t have that luxury.) There’s also the $600 billion – 20% of gross domestic product – being injected into everything from infrastructure to telecom to healthcare, financials and real estate. China’s also spending $40 billion just on telco in an attempt to build out the country’s domestic technology and promote wireless development. Fuel taxes, too, are being cut, residential housing is being incentivized, and the oil minister’s buying crude at $40 a barrel.
It’s not like the Communist Party has much choice, though. According to reports, from China’s own state-run publications, they’re trying to avoid another Cultural Revolution. On the 20th anniversary of Tiananmen Square, you better believe the central authority wants to maintain order. As Cramer said, “There’s nothing like the possibility of being overthrown to keep the money rolling.” And the way to do that right now is by getting China’s economy back on track.
Given China’s dominating role here, Cramer recommended a broad Chinese exchange-traded fund like the Xinhua China 25 Index and the companies that need a strong world economy to work – the infrastructure and commodity names – because that’s who will benefit from China’s stimulus.
But, of course, don’t throw away all of your recession stocks just yet. You’ll need them to keep diversified.
Jim’s charitable trust owns Freeport-McMoRan and Xinhua China 25 Index.
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