Basic Materials, Commodities, etc. Are Not the Best Way to Play a China Resurgence

Much has been made of the waves China made overnight with talk of incremental stimulus measures.

The SSEC rallied nearly 4% on that news.

However, we would caution anyone looking to play any resurgence in China against using the playbook from the past to do so.

What playbook are we speaking of?

Buying anything catering to the country’s infrastructure build-out including basic material and mining stocks, natural resource commodities, steel stocks, etc.

Not to say those areas can’t rally.

That said, we have higher conviction that global, U.S.-based consumer companies will out-perform these areas, over the longer-term, if the theme of secular Chinese growth re-emerges.

Specifically, we’re talking about companies like Disney (DIS), which plans to open its first mainland Chinese theme park in 2015 and is trading at an all-time high.

To support this view, we present the chart below, which shows the ratio of stocks vs. commodities dating back to 1870 – as the line rises stocks out-perform commodities.

If you believe this chart, it suggests that stocks are about to begin a new secular wave of out-performance vs. commodities.

If so, it follows that commodities and their derivative stock plays will likely under-perform non-commodity related areas and stocks, such as DIS.

Just an FYI because as Wayne Gretzky once said, “skate to where the puck is going, not where it’s been”.

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