It is the China paradox. At the same time Chinese companies are growing stronger and stronger, Western investors are growing more and more
pessimistic about them.
Jim Chanos says China is "Dubai x1,000". Muddy Waters and other short-sellers are uncovering one Chinese stock fraud after the next. Western investors looking at China are seeing disturbing trends at the macro level and disturbing behavior at the micro level.
So how does one invest confidently and safely in the world's #2 economy? This is becoming perhaps the most important question in value investing today.
We spoke with Kevin Carter of Baochuan Capital about this. Based in California and China, Kevin is a longtime expert on Chinese stocks. We spoke with him about where he sees opportunities in China today and how Western-based investors can capture them.
Jeff: What is your primary approach? Industries, long vs. short, good, vs. great companies, value vs. growth. How do you position yourself?
Kevin: We have three approaches for investing in China. The first strategy is one that takes advantage of two of the key elements of China - and maybe they're not unique just to China but to all emerging markets. They are that the benchmark indexes are very flawed and that the markets are very volatile.
When people invest in China or other emerging markets, they are looking for growth. But traditional indexes for those markets actually leave you very heavily invested in non-growth types of companies, such as state-owned banks, energy and materials companies. One of our strategies is to correct for that and then take advantage of the high volatility. That's one strategy we use.
The second strategy we have, and the second fund we have, is to go long China in a diversified fashion. But again, not just taking the traditional market capitalization index but to include companies like Yum! Brands. Yum! might be classified as a U.S. company but by most measures it is growing because of its China exposure.
The third approach we take is a much more traditional value approach. As you described in the title of your newsletter, "What would Warren Buffett do? How would Warren Buffett invest in China?" To me, it really comes down to two things: great businesses and good prices.
The full article is available for download here.