Saut: 5 Risk Adjusted Ideas; Increasing Exposure to China

by: Jeffrey Saut

Excerpt from Raymond James strategist Jeffrey Saut's latest essay (published Monday, March 14th):

...If correct, as the world’s second largest economy, the recent strength in China’s stock market is a monstrously positive thing since it would tend to indicate China’s economy remains vibrant.

Worth considering is that the anti-government demonstrations in the Middle East have heightened fears of similar events in China. To squelch such sentiments, the Chinese government is likely going to provide increased subsidies to farmers and the urban poor. In turn, this should increase China’s domestic demand for “stuff” (read: commodities), as well as pull the world’s economies forward. Moreover, I have argued for some time that while China’s interest rate ratchets are being “spun” as an attempt to cool its real estate market, they also serve to bolster China’s internal domestic demand, increase the value of its currency, and consequently placate U.S. politicians’ calls for a stronger renminbi.

Manifestly, China realizes that in the long run it needs to move from an export driven economy to one of rising domestic consumption, a fact that becomes readily apparent when reading China’s most recent “Five Year Plan.” To take advantage of this insight, I will be increasing exposure to China over the coming months. Those investments will center on companies benefiting from a boost in domestic consumption, yet I will be avoiding China’s property market because I do think it to be in a bubble.

...I have actually begun to commit some of the cash raised over the last few months back into select equities. To reiterate, my favorite risk-adjusted ideas are: The Williams Companies (WMB/$29.98/Outperform); Campus Crest Communities (CCG/$11.30/Strong Buy); IBERIABANK Corporation (IBKC/$55.92/Strong Buy); LINN Energy (LINE/$38.13/Strong Buy); and the closed-end fund Royce Value Trust (RVT/$14.75).

Speaking of closed-end funds, our Japanese closed-end fund investments got whacked last Friday on the tsunami tragedy. HowJapan plays from here, provided there is no nuclear meltdown, can be argued two ways. Arguing “the glass is half empty,” one can fret about the additional debt that will be needed to rebuild. Arguing “the glass is half full” suggests there will be a tremendous pick-up in economic activity. While I tend to embrace “the glass is half full” viewpoint, similar to my stance on the U.S. equity markets, investors should never let a profit turn into a loss. Accordingly, I will be watching our Japanese investments closely with that “loss point” in mind. Also worth considering, Japan has now lost 10% of its electric power, further increasing world-wide demand for oil, natural gas, and coal – clearly a drag on the world’s economy.