By Keith Fitz-Gerald
Money Morning/The Money Map Report
Investors who abandon China now will live to regret their decision.
Even if the U.S. economy skids into a recession, China will continue to grow for decades to come. And that's after nearly 30 years of double-digit growth that country has already logged into the history books.
Here are some key points to consider.
First, China remains one of the strongest economies in the world. Indeed, it's on track for 10% -12% growth this year – and that's after China's government has taken steps to slow the country's economy down. We aren't so naïve as to expect a straight path of uninterrupted growth – but we also don't buy into the "modified" old adage that "if the U.S. catches a cold, the rest of the world comes down with pneumonia," either – especially when it comes to the Red Dragon.
China remains awash in liquidity, and much of that is being focused on the upside, particularly when it comes to building consumer awareness and boosting disposable income there.
And now that liquidity is allowing the country to go on a global shopping spree, enabling its companies and its state-run sovereign wealth funds to pick up such choice assets as shares in global banking giant Citi at bargain prices. [To fully understand the massive impact sovereign wealth funds will have, and to see how to profit, check out our brand new investment research report on the topic by clicking here. The report is free of charge].
China's markets are quickly becoming much "narrower." Money is being reallocated from highly risky ventures into more-predictable, stalwart performers – many of which we've talked about.
That's an important trend for investors to track, for history shows time and again that these "stalwarts" fare the best during uncertain, volatility-laced markets. One advantage that these companies have, believe it or not, is that they don't have to tap into the credit markets at a time when credit is costly, or not available at all. Weaker companies won't be able to get financing, even if it is available.
Another critical advantage is that they have real profits. Many marginal Chinese companies exist on the slimmest of margins and their profits have actually been based to date on tax or export incentive "loopholes" that are now being eliminated by Beijing.
The bottom line: During periods when the economic underpinning is uncertain, or volatile, strong companies will be able to keep growing, while their weaker counterparts won't. And we all know what happens to companies that disappoint investors and don't grow [It's just not pleasant to think about…]
A still-weak greenback will make brand-name imports [both products and services] even more popular in China. And rapidly growing consumer income will give China's increasingly image conscious consumers the cash to buy them with.
We've been predicting that these two trends would converge for some time. That's one reason why, all the way back in September, we said that brand-name companies such as MGM Mirage (MGM) were actually high-profit plays on China. And we still feel that way.
So, the bottom line is that if controlling risk is key to your overall investment strategy, as you sift through China-oriented investment opportunities, look for companies that generate revenue and profit "because" of China including those that are based in more-highly regulated markets such as the United States and Europe.
Look, too, for companies with a solid dividend yield because the cold hard cash you receive can go a long way towards reducing your downside.
Every investor must have a China strategy these days.
And, while choosing to sit on the sidelines is certainly a viable decision, longer term it's probably just not a profitable one.
Money Morning Executive Editor William Patalon III contributed to this article.
If you are interested in learning about a more-sophisticated China investment strategy, which includes direct high-profit plays on that market, check out Keith Fitz-Gerald's New China Trader service by clicking here.
News and Related Story Links:
- Money Morning Economic Analysis:
Once an Exporter of Products, China Now Leading Global Exporter of Inflation.
- Money Morning Investment Research Report:
Here's Why MGM is a High-Profit Play on China.
- Money Morning Special Investment Research Report:
Outlook 2008: Three Ways to Profit From Sovereign Wealth Funds – the "Next Wall Street."
About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.