Joseph L.
Shaefer
submits:
Globalization is seductive. And data may be presented,
especially beyond the pale of strong accountancy, that creates a
false confidence. In times when our own markets are more volatile,
an economy like China's is particularly seductive. It seems to be
on the straight-line progression the current generation of US
investors enjoyed, and came to expect, from 1982-2000 (and now feel
cheated that it ended, as all secular bull markets do).
I would advise caution in pursuing this investment avenue too
wholeheartedly. That is not to say I would eschew international
diversification! Nor that I don't own some Chinese stocks. Simply
that I prefer to place the bulk of my and my clients' portfolios in
nations where the rule of law trumps the rule of a central
committee, where physical and intellectual property rights are
respected and enforced, where nepotism and favoritism are subjected
to the harsh sunlight of a free press, and where entrepreneurialism
abounds alongside natural and intellectual resources. In this last
I can recommend China; in the others, I fear we must tread lightly.
Here's why I recommend greater diversification: First and
foremost, if the USA and the EU are the primary customers for
China's products (most of which are consumer rather than industrial
products) and consumers in both the US and Europe snap their
wallets shut, what will power the Chinese juggernaut? They have
virtually no middle class at home and their Asian neighbors often
produce goods more cheaply than China does.
As importantly, Chinese workers are no different than American
workers or Japanese workers or German workers. Each in their time
had numerous laborers willing to work for a pittance so they could
have a better life for themselves and their children. Each in turn
began to demand higher wages as being only fair, given the
experience and talent they gained, which leads to increased
productivity.
It will be no different in China. It is actually in China's
interest to pay its workers more; doing so will create the middle
class that is now missing so that in future tough times, they can
rely on their own consumer base to muddle through. Higher wages
would make other nations less protectionist, as well. But even if
neither of these revelations sinks in, it will simply happen
because farm kids subsisting on rice and dried fish will move to
the cities and happily labor for next to nothing for the first few
years. It's new, it's exciting, you can now afford to eat meat or
poultry twice a week, maybe you and your roommate even share a
motorbike. But it is simply immutable human nature that the thrill
wears off and you'd like chicken
three
times a week or you'd like to have your
own
motorbike. The pressure to increase wages genie is out of the
bottle and there's no putting it back in.
I add to this volatile mix simmering ethnic strife; horrible air
and water pollution; a lack of fresh potable water; poor corporate
governance standards; the need to create 24 million new jobs a
year; an aging population with no social safety net; a banking
system that is used for political goals and therefore instructed to
loan where politicians decide, not where responsible bankers
decide; and a statist government that engenders false reporting
from the hinterlands by its draconian punishment of those who fail
to deliver. With this tsunami just over the horizon, I don't see a
straight-line progression of success for China.
There are certainly some well-run companies there and I own some
of them. CNOOC (
COO
) seems to be a fine company that meets international reporting
standards, as are many others. I have even speculated in China - we
own Shun Tak Holdings [SHTGY], the biggest ferry operator from the
mainland to the newer, bigger Las Vegas on Macau - a play on
gambling and the Chinese love of same.
But for me, the best way to play China is via other nations that
have what China wants and needs: Canadian timber, Australian oil,
Singaporean markets, and US grain all leap to mind. In these
places, I can enjoy good corporate governance and the rule of law,
yet still benefit from China's growing needs by buying quality
companies in nations I am more comfortable will experience
significantly less upheaval. I'll discuss some of these firms in
the coming weeks. When you see them, see if you don't agree that
you can profit from China's growth without taking on China's
potential problems…
Disclosure:
Long SHTGY, have been long other China stocks in the past and
likely will be again. But prefer to play "China growth" via those
companies from nations that supply China with what it needs to keep
its economy going.
Disclaimer:
As Registered Investment Advisors, we see it as our responsibility
to advise the following: we do not know your personal financial
situation, so the information contained in this communiqué
represents the opinions of the staff of Stanford Wealth Management,
and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an
obvious statement but clearly too often unheeded judging by the
number of investors who buy the current #1 mutual fund only to
watch it plummet next month.
We encourage you to do your own research on individual issues we
recommend for your analysis to see if they might be of value in
your own investing. We take our responsibility to proffer
intelligent commentary seriously, but it should not be assumed that
investing in any securities we are investing in will always be
profitable. We do our best to get it right, and we "eat our own
cooking," but we could be wrong, hence our full disclosure as to
whether we own or are buying the investments we write about.
See also
Trading the Stealth Momentum Shift
on seekingalpha.com