What China's Investment Trends Are Telling Us Now

Many investors have reaped their biggest gains by playing the stock-market equivalent of "follow the leader." In the past, investors pursuing this strategy have followed the moves of such luminaries as Warren Buffett, Jim Rogers, Bill Gross, and even the late Sir John Templeton.

But there's now a potential new "leader of the pack" whose moves investors need to watch and even emulate.

We're talking about China.

No billionaire investor or investment bank has the resources to match the market-moving potential of the Red Dragon. That's why diagnosing China's investment strategy is almost a prerequisite for maximum profits.

Of course, Beijing is notoriously secretive about its investments. So it takes a little bit of detective work to find out what China is up to. But a big piece of the puzzle fell into place Monday when China Investment Corp. (CIC), the Asian giant's $300 billion sovereign wealth fund, revealed that it purchased about $9.6 billion worth of U.S. stocks last year.

CIC now owns sizeable stakes in some of America's largest and best-known corporate brands, including Apple Inc. (Nasdaq: AAPL), Citigroup Inc. (NYSE: C), The Coca-Cola Co. (NYSE: KO), and Visa Inc. (NYSE: V), according to the fund's 13F filing with the Securities and Exchange Commission (SEC).

The two largest holdings as of Dec. 31 included $1.77 billion in Morgan Stanley (NYSE: MS) and holdings valued at $3.54 billion in Canada's Teck Resources Ltd. (NYSE: TCK).

CIC bought its stake in Morgan Stanley in June, when the firm was seeking to raise cash to pay back money borrowed from the Troubled Asset Relief Program (TARP).

Those two investments alone made up 55% of CIC's total investment in the U.S. market.

CIC disclosed stakes, mostly small, in more than 60 companies, including:

  • $498 million in the U.S.-traded stock of Brazilian miner Vale SA (NYSE ADR: VALE).
  • $333 million in Visa.
  • $29.8 million in Citigroup.
  • $19.9 million in Bank of America Corp. (NYSE: BAC).
  • $14.7 million in American International Group Inc. (NYSE: AIG).
  • $9 million in Coca Cola.
  • $6.3 million in Apple.
  • $4.1 million in News Corp. (Nasdaq: NWSA).
  • $1 million in Canada-based Research in Motion Ltd. (Nasdaq: RIMM).

Some previously unknown investments, like the company's $713 million investment in BlackRock Inc. (NYSE: BLK), were also disclosed in the report.

Along with its investment in Citigroup, Bank of America and American International Group, the purchases reflect a clear emphasis on the financial-services sector, a U.S. economic strength, but an industry whose shares were beaten down to obscene levels during the financial crisis.

Also, it's hard to find anything in the portfolio that one might consider a risky bet. And outside of its two large bets on Morgan Stanley and Teck Resources, CIC's capital is widely spread over multiple companies in varying sectors.

"These could be the stock holdings of a 65-year old widow," Michael McCormack, an executive director at Shanghai-based research firm Z-Ben Advisers, told The Wall Street Journal.

That is relevant because it shows China is investing, rather than gambling.

China Shopping List Chart
Indeed, with $2.4 trillion in foreign currency reserves, China has enough money to move markets. But that doesn't mean the Red Dragon has turned into the world's largest day-trader. Instead, China is investing for the long haul - in corporations that offer stability and strong growth potential, as well as the raw materials that are expected to fuel the nation's coming of age.

This viewpoint is evidenced by CIC's $3.54 billion stake in Teck Resources - the company's largest single holding. In addition to Teck, the CIC took stakes in Anglogold Ashanti Ltd. (NYSE: AU) ($4 million), Anadarko Petroleum Corp. (NYSE: APC) ($6.2 million), Gold Fields Ltd. (NYSE ADR: GFI) ($4.6 million), and Freeport-McMoran Copper & Gold Inc. (NYSE: FCX) ($4.7 million).

Sticking to its mandate of diverse exposure, CIC also poured millions of dollars into commodity-based exchange-traded funds (ETFs), including the Market Vectors Gold Miner ETF (NYSE: GDX), the SPDR Gold Trust (NYSE: GLD) and the United States Oil Fund LP (NYSE: USO). With 2 million shares of USO - 3.48% of shares outstanding - CIC has become the fund's fourth-largest stakeholder.

"It looks like they are aware of their market power in commodity markets and want to hedge against the impact their buying has on commodity prices," Timothy Condon, chief Asian economist with ING Groep NV told Bloomberg. "I think the reserves, via the CIC, will be used to hedge the risk of a cutoff of key raw material supplies by buying stakes in commodity producers."

Finally, CIC made sure to mix in a healthy exposure to markets outside the United States. That includes stakes in the iShares Emerging Markets Index (NYSE: EEM), iShares MSCI Japan Index (NYSE EWJ), and the iShares MSCI EAFE Index Fund (NYSE: EFA).

In addition to these holdings CIC has reported stakes exceeding $6 billion in several Hong Kong- and London-listed equities, as well as the debt of Malaysian and Indonesian coal companies. The sovereign wealth fund also has been buying stakes in Australia's biggest banks. CIC last fall paid $646 million for a stake in Noble Group - a diversified commodities company based in Hong Kong.

CIC will likely broaden its investments in emerging markets this year, particularly in Brazil and Russia where it has made some initial contacts and where opportunities are plentiful, Lou Jiwei, the sovereign wealth fund's chairman, said in January.

"Emerging markets no longer rely on capital from the outside," he said. "Emerging markets are key for stabilizing the world economy."

[Editor's Note: For an additional perspective on this important developing story, check out a column by Chief Investment Strategist Keith Fitz-Gerald, which appears elsewhere in today's issue of Money Morning. To read that column, please click here.]

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