How to Profit From A China Investing Strategy

[The Second of Two Parts]

By William Patalon III
Executive Editor

Money Morning/The Money Map Report

Investors who abandon China now will live to regret their decision.

That’s why we say that every investor has to have a China investing strategy.

With the benchmark Shanghai stock index down 56% so far this year, you might find that to be a surprising statement. But consider this: In an exclusive interview with Money Morning, global investing guru Jim Rogers said that giving up on that country now would be like selling all your U.S. stocks at the start of the 1900s - before America created massive wealth by evolving into a world superpower.

“I have never sold any of my Chinese companies,” Rogers said. “You know, selling China in 2008 is like selling America in 1908. Sure, let’s say the market goes down another 40% - so what! You look back over 100 years, you look back from the beauty of 1928, or even 1938 [in the depths of the Great Depression], and there is somebody who bought shares in 1908. He was still a lot better off having not sold in 1908.”
Even if the U.S. economy skids into a recession, China’s long-term growth outlook remains strong – and that’s after nearly 30 years of double-digit growth that country has already logged.

Here are some of the key points – as well as some profit plays – to consider:

First, China remains one of the strongest economies in the world. Even after China reduced its growth outlook, the country remains on track for an economic expansion of better than 9% for the year to come. We aren’t so naïve as to expect a straight path of uninterrupted growth. But neither do we expect a U.S. downturn to squelch the Red Dragon’s long-term growth prospects.

For broad exposure to China’s growth, consider the China Region Opportunity Fund (USCOX), managed by the San Antonio-based U.S. Global Investors Inc. (GROW).           
Second, China remains awash in liquidity, with $1.68 trillion in foreign reserves. And much of that excess capital is being focused on the upside, particularly when it comes to boosting disposable income and then building brand awareness for its own products.
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 at bargain prices. One beneficiary of such outside capital: Companies such as MGM Mirage (MGM), which is being positioned as a high-profit play on China.

Third, China’s markets are quickly becoming much "narrower." Money is being reallocated from highly risky ventures into more-predictable enterprises. That’s an important trend for investors to track, for history shows time and again that these more-predictable ventures 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. Consider such potential “New Dragon” companies as online media player SINA Corp. (SINA) or fast-growing advertising play Focus Media Holding Ltd. (ADR: FMCN), for instance. As the economy becomes more “normalized,” consumers will increasingly need such products as insurance, so take a look at China Life Insurance Co. Ltd. (ADR: LFC).

Fourth, many of China’s companies are now reporting real profits. For decades, most Chinese companies operated on the slimmest of margins, with profits that were actually based on taxes or export-incentive “loopholes.” They were kept on life support with an endless stream of bank loans. All of this is being eradicated by Beijing. Money is being taken out of highly risky ventures, or the uncompetitive, state-run enterprises that are ridden with debt. In China, that capital is now being redeployed into the innovative, more-promising ventures that we refer to as the “New Dragons” – many of which are destined to rival the U.S.-based “Global Titans” as the dominant global brands and investor stalwarts of tomorrow. One New Dragon that’s already making a global splash is solar-energy player First Solar Inc. (FSLR). Also consider Huaneng Power International Inc. (ADR: HNP), the domestic China power producer that’s also getting involved in projects outside its home market.

Fifth, the still-weak U.S. greenback will make brand-name imports (both products and services) even more popular in China. And rapidly growing consumer income will give China’s consumers the cash to spend on such one-time luxuries as travel and tourism. One big beneficiary: The Boeing Co. (BA) of the United States, which says that China and other Asian nations will need $340 billion worth of new aircraft over the next two decades.

Sixth, look for companies that generate revenue “from” China, even if they’re not based “in” China. This is a great risk-management strategy: It’s a way for investors to profit from China, while enjoying the investor protections and regulatory oversight of such developed markets as the United States and Europe. The Global Titans are our No. 1 choice here. Many pay a dividend, as well.

If you’re seeking some solid, specific picks, some of the best ones to consider include PepsiCo Inc. (PEP), Diageo PLC (DEO), Yum! Brands Inc. (YUM), McDonald’s Corp. (MCD), The Coca-Cola Co. (KO), and a few others.

The bottom line is this: These days, and forever more, every investor has to have a China investing strategy. And while choosing to sit on the sidelines certainly qualifies as a strategy, remember this: Over the long haul, it’s probably not a profitable plan to follow.

[Editor’s Note: The first part of this two-part story – Why Every Investor Should Have a China Investment Strategy – appeared in the Aug. 8 issue of Money Morning.]

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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