25 Years After Tiananmen, Can the Dow Outperform Chinese Stocks?

The Dow has reversed China's fortune over the past five years, but will the good times continue?

Jun 4, 2014 at 12:30PM

The Dow Jones Industrials (DJINDICES:^DJI) are once again proving their resiliency Wednesday, as the average has bounced back from an early morning loss to climb four points into the green as of 12:30 p.m. EDT. From a longer-term perspective, the Dow has rewarded investors handsomely, even outpacing formerly hot emerging markets such as China in recent years. Yet as China marks the 25th anniversary of the demonstrations in Tiananmen Square, Dow investors have to wonder whether the U.S. stock market can keep outpacing the Asian power's superior economic growth.


The rise and fall of China
Twenty-five years ago, the prospect of investing directly in China seemed almost unthinkable. Prior to its return to Chinese control, the Hong Kong stock market provided the only entry point into companies exposed to the Chinese economy. Even after the Shanghai Stock Exchange opened in 1990, its limitations on foreign investors made it an unwieldy vehicle at best for those interested in China.

Over the years, though, the rise of exchange-traded products made it far easier to invest in China. Closed-end mutual fund China Fund (NYSE:CHN) and ETF iShares China Large-Cap (NYSEMKT:FXI) gave investors different investments in the emerging market, but they helped raise China's profile as an investment venue and participated in the huge run-up in emerging markets generally over the past decade, dramatically outperforming the Dow-tracking SPDR Dow Jones Industrials ETF (NYSEMKT:DIA).

FXI Total Return Price Chart

Total Return Price data by YCharts

More recently, though, China has fallen on harder times. While its economic growth rate still dwarfs that of the U.S., concerns about the sustainability of that growth have held its stock market back. In particular, a real-estate market that many consider overheated and signs of cracks within the nation's financial system due to excessive credit extension have made investors more nervous about China's future. Meanwhile, the Dow Jones Industrials have prospered from the U.S. recovery from the financial crisis, and so the blue-chip index has easily outperformed the China Fund and the iShares China ETF since 2009.

FXI Total Return Price Chart

Total Return Price data by YCharts.

China Flag

The big question
China has made huge progress, but to grow further, the emerging-market nation will have to continue its transition to a more open-market economy. State oversight has undoubtedly helped Chinese companies domestically, but it has also created tension with trade partners across the globe. For instance, Chinese solar stocks have faced numerous trade barriers, with the latest blow coming this week when new U.S. tariffs hit Chinese solar-module suppliers even when using foreign solar cells. Similar conflicts over intellectual property rights and other hot-button issues have threatened China's relationship with the U.S. and the rest of the world.

If China puts its energy into competing on the global economic stage, it has the capacity to deliver results that could outpace the Dow Jones Industrials in the long run. But if the Chinese government insists on keeping its stranglehold over the economy, then returns for investors will suffer.

You can't afford to miss this
"Made in China" -- an all too familiar phrase. But not for much longer: There's a radical new technology out there, one that's already being employed by the U.S. Air Force, BMW and others. Respected publications like The Economist have compared this disruptive invention to the steam engine and the printing press; Business Insider calls it "the next trillion dollar industry." Watch The Motley Fool's shocking video presentation to learn about the next great wave of technological innovation, one that will bring an end to "Made In China" for good. Click here!

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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