Much has been made of the recent "slowdown" in the Chinese economy. Some investors seem to be getting cold feet. As stated by economist Dariusz Kowalczyk in a recent Reuters article,
What's really worrying is new orders have started to shrink and inventories have started to build up at an unusually fast pace.
The Reuters article also establishes just how awful growth prospects in China really are.
China's annual economic growth is expected by analysts to fall to 7.9 percent in the second quarter, the first dip below 8 percent since 2009. That could pile pressure on authorities to take further policy action to support growth.
I don't know about you, but that 7.9% growth figure is really scaring me. Man, it's not like the IMF forecast year-on-year U.S. growth at 1.8% or anything.
The fact that the Chinese economy is now "only" growing at 7.9% is absolutely nothing to worry about. I view the recent Chinese governmental actions (rate cuts and bank reserve ratio cuts) as positive/supportive for business in China, and consequently, the Asian stock market as a whole.
Consider the following facts:
- Growth in China is still 4x U.S. growth
- Growth in China is still 2 to 2.5x projections of global economic growth
- Chemicals and basic materials are still in strong demand in Asia, with American exports of chemicals projected to grow 11% year-on-year and surpass $230B in 2014.
- Historically, the market favors rate cuts
How To Play the Asian Markets
There are several methods to play the Asian markets. Some are direct, while others are indirect.
Category 1: Direct Investment
- Many ETFs offer Asian or Chinese exposure. Several, like the iShares FTSE/Xinhua China 25 Index Fund (FXI) and the iShares MSCI Hong Kong Index Fund (EWH), are at particularly attractive entry points right now, with prices down relatively close to the 52-week low.
- Several mutual funds offer interesting Asian investment opportunities. For example, the Matthews Asia Dividend Fund (MAPIX) has a 3.9% dividend yield and the potential for long term growth.
- Buying ADRs of individual stocks is always an option, but this can be risky and is not always suitable for retail investors.
Category 2: Indirect Investment
For those who prefer to keep their money closer to home, there are several ways to play Asian growth without investing directly in Asia.
- Invest in domestic sectors with potential for export growth tied to Asian industry growth. My favorite is the chemicals/basic materials sector, which is extremely undervalued and poised for huge growth. As mentioned earlier, exports are projected to grow 11% year on year, and any further unexpected Chinese growth in manufacturing or industry (as a result of Chinese rate cuts and credit stimulus) could boost these projections even higher. The undervalued chemicals sector offers a hedge of sorts, because even if Asian growth slows, the chemicals sector is expanding in the US, Africa, and South America. Companies like DuPont (DD) and Dow Chemical (DOW) look good, as do chemical and materials sector ETFs and mutual funds.
- Invest in U.S. companies like Apple (AAPL) that have the potential for huge growth as the billion-strong Chinese population gains increasing access to a consumeristic middle class lifestyle.
- Invest in a "world" stock fund or ETF, like the Vanguard Total World ETF (VT). I personally don't like this strategy, because it raises European exposure, but some investors might find it to their liking.
- Invest in an emerging markets fund or ETF, like the Vanguard MSCI Emerging Markets ETF (VWO). This ETF gives you Chinese exposure through companies like China Mobile, but also offers a hedge by providing exposure to other emerging markets like South America.
Conclusion: Chinese Rate Cut Isn't A Bad Thing
Asian growth is unlikely to fall behind growth rates in other areas of the world. The Chinese government has proven that it is willing and ready to stand behind the economy and support further growth, so investors have no need to fear. Look for attractive entry points on either the direct or indirect plays, and watch your investment grow with the rapidly expanding Asian market over the coming decades.
Disclosure: I am long the chemicals sector via the Fidelity Select Materials Portfolio (FSDPX), and I may initiate a long position in one or more Asia/China-focused ETFs over the next 72 hours.