Making big buys in the Chinese stock market
Many worry that the Chinese stock market bubble will burst, but this U.S. advisory disagrees and recommends some big buys for the future.
Sometimes it seems like it’s all about China these days.
China and Google fight over censorship. China changes its monetary policy overnight. China’s vast infrastructure spending spree threatens to create a gigantic bubble.
Is it all too much? Will the bubble burst? Can we really expect China to be the wave of the economic future?
Yes we can, says an influential U.S. advisory. Here is a quote from Mr. Stephen Leeb, editor of The Complete Investor.
“In our view, China, far from being in the final throes of an unsustainable burst of reckless stimulus spending, is in the early stages of an ambitious two-pronged, long-term campaign designed to transform the nation.”
It’s all about bringing the vast army of rural Chinese into the modern age, says this editor. And that requires access to goods, construction of roads, rails, cities and more.
“If we’re right,” he says, “commodities will keep rising.” Yes, there are liable to be setbacks along the way, he admits. Treat them as buying opportunities.
And what should we be buying? Certainly, there are many individual stocks that will profit from China’s thirst for commodities and other goods.
We’ll look first at a few of these. But this advisory is also adding one big exchange traded fund to its arsenal.
Silver for solar power
There are a number of stocks in this advisory’s Growth Portfolio that will surely benefit from China’s growth, says Mr. David Sandell, who takes the baton from Mr. Leeb in order to discuss specific investments in China.
Two of the biggest are Brazil’s Vale Inc. (NASDQ-VALE), which of course is Vale Inco in Canada, and Australian giant BHP Billiton (NYSE-BHP), the world’s biggest mining conglomerate. Vale is trading at $31.38 and yields 1.5 per cent on its $0.47 dividend. BHP trades at $81.18 and yields 2 per cent on its dividend of $1.64.
Gold is important to protect against “the inflation that China’s voracious appetite for commodities will likely generate,” says the writer.
But silver counts too. It is “a metal essential in solar power, whose growth in China is surging.” Canada’s Silver Wheaton Corp. (TSX/NYSE-SLW) is also in the advisory’s Growth Portfolio. It trades at $17.72.
The big fertilizer companies are bound to benefit from China’s need to feed its huge population, although they’ve hit a bit of a brick wall in negotiations with China. That makes Potash Corp. of Saskatchewan (TSX/NYSE-POT) and The Mosaic Company (NYSE-MOS) better long-term prospects than short-term bets. Potash’s shares are trending down at $119.50 and yield a modest 0.3 per cent on the 41¢ dividend. Mosaic is at $62.12 and also yields 0.3 per cent on its dividend, which is 20¢.
Then there are the mammoth consumer firms. The world leader in semiconductors, Intel Corp. (NASDQ-INTC) trades at $21.21 and yields 2.6 per cent on a dividend of $0.56. The inescapable Coca-Cola (NYSE-KO) is at $57 and yields almost 3 per cent on its $1.64 dividend.
But how about investing directly in China with one big package?
Largest and most liquid
The package this advisory recommends is iShares FTSE/Xinhua China 25 Index (NYSE-FXI). This fund seeks to replicate “an index of the 25 largest and most liquid Chinese companies,” says Mr. Sandell.
Financial firms make up 50 per cent of its holdings. Energy and materials are the next biggest group, accounting for 25 per cent of the overall assets.
We think it worth noting that this fund earned the recommendation of a man who did not make recommendations loosely, the late Mr. Irwin T. Yamamoto, publisher of The Yamamoto Forecast.
Noted for his deep skepticism, Mr. Yamamoto was conspicuously accurate in his market forecasts before and during the credit crisis, and consistently successful with the sparse recommendations he did make.
So let’s open the package and see what’s inside.
Avidly seeking cell phones
The biggest single chunk of this fund — a full 10 per cent — is made up of one company. China Mobile Ltd. (which also trades as an American Depositary Receipt under NYSE-CHL) is the world’s largest wireless carrier.
This company has 70 per cent of China’s mobile phone market, and “hundreds of millions of China’s citizens are avidly looking to join the ranks of cell phone owners,” says Mr. Sandell. That alone should make it a strong and reliable grower, he adds.
While China’s financial markets may be less developed than those of the west, its banks have been more stable than many of their U.S. and European fellows. “And thanks to the Chinese government’s stake in the country’s banks,” says the writer, “they truly are too big to fail.”
Thus the fund’s second largest holding is China Construction Bank, one of the four big state-owned banks. It handles personal banking services, to be sure, but it also has a corporate division that hones in on infrastructure, oil and gas, telecommunications and other areas of growth.
Meanwhile, there’s another world’s biggest in the mix. The world’s biggest publicly traded life insurance firm is not headquartered in New York or London but in Beijing. It is China Life Insurance (which also trades as an ADR under NYSE-LFC).
One of the biggest assets China Life has is the country’s aging population. The number of citizens over 60 should top 430 million by the middle of the century.
Mr. Sandell singles out one more stock in the group of 25. Industrial and Commercial Bank of China is China’s largest commercial bank and (once again) the largest in the world in terms of market capitalization.
This big fund has a fairly small expense ratio, the writer tells us, at just 0.73 per cent. The shares have been moving up since spring and trade at $41.96. Not least, it yields 1.8 per cent on a dividend of $1.24.
If China’s a bubble, this advisory insists, it’s one that investors can float on for years to come.
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