What if you knew - for certain - a major investor was going to scoop up shares of a company?
Well, in theory, you could buy those shares and then enjoy the ride higher as more and more traders jumped in howling, "Me too!"
Now, I'm not talking about following hedge fund titans like John Paulson or Warren Buffett. Right now I'm focusing on an even bigger fish - one that's rewarded its followers with the chance to earn incredible returns - from 17% to 44% to over 1,000% - over the past 18 months.
I'm talking about the China Investment Corporation (CIC for short). If you're not familiar with this group - they're the speculating arm of China's Sovereign Wealth Fund.
From their 2010 Annual Report (.pdf):
[The CIC] was established as a vehicle to diversify China’s foreign exchange holdings and achieve higher risk-adjusted returns on its investments in the context of China’s macroeconomic requirements and further reform of its financial system.
Over the past couple years, they've started to nibble on overseas stocks. But some recent chatter leads me to believe their next move could be a giant "chomp!" bite. And lucky for us, one Chinese central banker, Li Daokui, may have tipped their hand.
We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.
(Source: Ambrose Evans-Pritchard)
How much could China invest in these companies? Well, her dollar holdings are thought to be in excess of $2 trillion. So, technically, she could buy Apple (NASDAQ:AAPL) ($372B), Intel (NASDAQ:INTC) ($113B) and Boeing (NYSE:BA) ($43B) and still have almost $1.5 trillion left over.
But don't expect any outright take-overs. China denies she wants to swallow companies whole...at least for now. But she sure looks hungry.
Last year, China added John Mack, former CEO of Morgan Stanley to their International Advisory Council.
And then, the shopping spree began...
$1.58 billion for a 15% stake in AES Corporation: One of the world's largest power companies with 132 generation plants.
$416 million for a 45% interest in Penn West Energy's bitumen assets in Alberta: One of the largest oil and natural gas producers in Canada.$705 million for 3.1 billion shares of GCL-Poly Energy Holdings: One of the top polysilicon and wafer suppliers in the world to the solar Industry.
A $200 million stake in Chesapeake Energy: The USA's #2 producer of natural gas.
And a $73 million stake in BUMA: The #2 coal mining contractor in Indonesia.
As for 2011? Well, according to the official CIC website, they've made one acquisition so far, and a big one at that:
$3.15 billion for a 30% stake in GDF Suez: the #1 buyer and importer of natural gas in Europe.
(All the above stats were pulled from the CIC's most recent annual report (.pdf).)
Notice a theme here? They're all energy related. In fact, ALL of China Investment Corporation's recent Direct Investments - except one (BTG Pactual, a Brazilian Investment Bank) - were linked to coal, natural gas, oil and solar power.
This makes perfect sense. China can't produce enough power on her own. Not by a long shot. And along with India, she'll consume 31% of the world's energy by 2035.
This intense need to secure resources, along with the recent market crash, has me convinced she's about to go on ANOTHER huge shopping binge. So where is China likely to invest next?
Again, Chinese Central Banker, Li Daokui gave us a few stock picks - which, oddly enough, did not include any energy companies. Perhaps this signals a change to China Investment Corporation's strategy.
Let's see how these stocks have held up versus the S&P 500.
In the last three months, Apple and Intel outperformed the S&P 500. Boeing remains a laggard.
click to enlarge
Without a doubt, these companies belong in any long-term portfolio. But my gut tells me that China will look elsewhere before venturing into tech and manufacturing plays.
Here's the "what" and the "why"...
China Take-out Target #1: Gold Miners
China owns 1,054 tons of gold and clearly wants to add to her position. The problem is - like any large buyer - they can't secure tons of gold without pushing the price up. But China could certainly buy a controlling stake in gold mining companies. Which company is anyone's guess. But a bet on the GDXJ Junior Gold Miners ETF could capture the upside - as a Chinese acquisition sets off a firework's show of buy-outs across the industry.
China Take-out Target #2: Food Giants
There's no denying China's desperate need for food. She's incapable of growing enough grains, livestock or soybeans to feed her people. That's why Fred Gale, a Senior Economist at the USDA has designated (.pdf) China as the most important driver of world agricultural trade. So what's to stop them from taking out a chunk of leading AG companies like Archer Daniels Midland (NYSE:ADM) or Bunge Limited (NYSE:BG)? The easiest way to benefit from this buyout is to grab hold of the Market Vectors Agribusiness ETF (NYSEARCA:MOO).
China Take-out Target #3: Drug Makers
According to John P. Merritt (.pdf), a 20-year veteran of the Chinese health care industry, China's 60-and-older population will grow to 240 million by the year 2020. That's a lot of aching backs and leaking prostates to fix. And with most major drug companies now trading 25% to 40% off their highs, the time is ripe for China to make a buy. The best way to get exposure to the resulting pharma boom is the iShares Dow Jones Phama Index (NYSEARCA:IHE).
China is up to her ears in sovereign debt. It's a dead certainty that she'll continue to diversify these assets into revenue-producing, world-dominating energy, food, mining and pharmaceutical stocks in the months ahead. Getting exposure to these sectors at bombed-out prices will put you in position to profit from the coming wave of Chinese acquisitions.