China as an Investment Destination

IndexUniverse had an article up Monday about the rebalancing at Russell Investments that occurs every June and was just implemented for 2009. IU seemed most interested in the increasing presence of Chinese stocks.

The five largest stocks in the Russell Global Index (I'm not familiar with this one) in order are;

Petrochina (PTR)
ExxonMobil (XOM)
Industrial & Commercial Bank of China (IDCBY)
China Mobile (CHL) a client holding
Wal-mart (WMT)

We are all much more aware of China as an investment destination than we were seven years ago. I seem to remember that the first Chinese stock on the NYSE was Sinopec Shanghai Petrochemical (SHI), but I may have that wrong, and then it seemed like most people knew about Petrochina early in this decade when Warren Buffet first piped up about having a position.

Fast forward a few years and US based investors can now access Chinese solar stocks, water stocks, technology companies and even shampoo companies. We clearly had a mania in Chinese stocks for a while there, then the market imploded and now things are whipping up again but the Shanghai market is still down more than half from its high, the Hang Seng down about 40% from its high and the Hang Seng H Shares, or enterprise index, is down 45% from its high.

I've disclosed my involvement with China many times before. I sold my only position in May 2007 (the other Sinopec with ticker SNP) and bought back in with China Mobile in the summer of 2008. I was a little early on both getting out and getting back in.

If IPOs like BaWang can do well, the shampoo company mentioned above, then that is reason to be concerned about overheating despite being so far below the old highs. The long term fundamental case for China has been made many times in many places but the decline is a good reminder that the stocks will be cyclical and volatile even if the big picture story remains in tact.

The best way to avoid getting badly hurt from another implosion is simply to not own too much. I currently target a 2% weight and I could see getting as high as 5%. That's 5% and I absolutely love the theme. I loved the theme during the 14 months I had no exposure. As great as something might be you can still get it wrong. Being wrong is not as bad as what the consequence of being wrong might be.

Speaking of themes I love, there was an interesting segment on Squawk Australia on Tuesday morning (Aussie time) with Steve Johnson from a firm called Intelligent Investor. The end of the conversation was about his opinions on Australian Infrastructure funds/stocks. He said he currently likes four or five out of the 20 that he covers. Twenty? Macquarie and Babcock & Brown each have quite a few funds listed in Australia and there are a couple of others.

Infrastructure is just as important a theme as China (obviously there is overlap). The money is going to be spent on infrastructure and despite how much some of the stocks and funds went down, the money was never not going to be spent. The US is not quite at the investment saturation point that Australia might be (the US may have 20 funds out there to pick from but the Australian market is a tiny fraction of the US market) but with all the new sector talk and other hype out there you avoid getting really hurt by something unforeseen by not making a big bet.

I get questioned a lot on the don't make a big bet mantra but think about how many themes there could be out there and how many you might have an opinion on. Just the other day I mentioned a half dozen just in the industrial sector. Five or six themes at 5% each on top of the more plain vanilla things you may hold and you probably have a full plate.

Comments

[Mad Hedge F...:]

The real action will be in the BRIC countries, which will see upside returns double what you will get with the S&P 500. Buy Brazil’s Bovespa ($BVSP), Russia’s RSX (RSX), India’s Bombay Sensex ($BSE), and China’s FXI (FXI) or Hang Seng. And it may be time to spell BRIC with a “K” by throwing in the Korean Kospi ($KOSPI) as a sweetener.

Jun 30 01:20 PM

[Mad Hedge F...:]

Good. “If 1.4 billion people suddenly decide to spend an extra dollar a day, it will have a massive impact on what’s going on in the world,” said Andy Brough, a fund managers at Schroeder’s, about Chinese efforts to stimulate domestic consumption.

Jun 30 01:35 PM

[Larry House:]

China is certainly important, Roger. The story out of China cannot be totally bought hook, line, and sinker, but there should be some exposure. I have used MCHFX since March. With small allocations for certain countries, using mutual funds or ETFs are the only way to go. FXI will do. It should be kept in mind that neither China nor any of the other BRIC countries will be a great story without a moderately robust U.S. They are not yet independent of our economy. We need more than good stories to make money right now.

Jun 30 02:06 PM

[Think-About-It:]

I've been a bull on China for a decade but since reading "Capitalism with Chinese Characteristics" I've become much more cautious on China's long-term growth prospects? I own MPEL and HOGS but sold my Matthews China Fund a while ago.

My take away was that many of China's "opening-up" reform policies of the 80s [which provided much more diverse bottoms-up, entrepreneurial growth than the 90s growth which was more narrow and characterized by government directed big projects] have been repealed or are in the process of being made less affective as the Government reasserts its attempt to manage and plan their economy.

Any views on the message of this book or theme would be appreciated.

Jul 02 06:26 PM