Purpose: Expose China Opportunities for Smart Investors
The move by China's central bank to drop the yuan's rigid peg
to the dollar last week on the day of my return after a
three-week trip to Asia left a host of questions unanswered.
The basket of currencies that will allegedly determine the
value of the yuan going forward was not disclosed. What sort of
band the currency will be allowed to fluctuate within is not at
all clear. The 2% revaluation in the currency on Thursday
followed by a slight strengthening on Friday week may actually
encourage further short-term speculation since most economists
believe the yuan is undervalued by roughly 10% to 20%. With $1
trillion of trade transactions each year and hot money capital
inflows equivalent to 5% of its GDP, the uncertainty concerning
the Chinese currency is high.
Not In the Mainland
In the near term, this uncertainty gives investors an
opportunity to benefit not just from the expected strengthening
of the Chinese currency but the overall rise of Asian currencies
against the dollar. In early 2005, I advised clients that the
Euro's rise against the dollar was over and that Asian
currencies would be the next area to appreciate versus the
dollar. It may turn out that many of your best China investment
options don't involve investing in mainland Chinese companies at
all.
Direct Currency Approach
The cleanest direct currency play on the expected rise in the
yuan (also referred to as the renminbi) is to open a renminbi
currency account at Everbank. A leading online bank ranked
"Best of the Web" by Forbes, Everbank offers a variety of world
currency accounts as well as FDIC backed three and six month
CD's which offer attractive rates.
Direct iShare Approach
Another direct equity China play is through the China iShare
(FXI) that tracks the FTSE/Xianhua China 25 index that is
comprised of 25 of the largest and most liquid China names.
FTSE is a UK based index company and Xianhua is a China based
media company.
All of the 25 stocks included in the China iShare are listed on
the Hong Kong Stock Exchange. Some of them are incorporated in
mainland China (H shares) and some of them are incorporated in
Hong Kong (red chips). The total market capitalization of the
index is $170 billion. The broadest Xinhua China index includes
1,355 listed companies with a total market cap of $550 billion.
To put this in perspective, the average market capitalization
for a company in the S&P Global 100 Index is $70 billion.
Again, that's for one company. The China iShare provides good
exposure to three key sectors of China: energy (20%), telcom
(19%) and industrial (18%). This concentration can be viewed as
a plus or a minus depending on your perspective. For example,
some smart investors are placing a bigger bet on China's
consumer markets. The top five companies represent 40% of the
index. The annual operating expenses of the China iShare are
only 0.74% compared to 2% plus for other alternatives out there
including actively managed Asia and greater China region funds.
Keep in mind that most of these companies are still largely
controlled and owned by the Chinese government.
Indirect Approach
The best way to invest in China may be through more indirect
vehicles that benefit from Chinese growth and its currency
moves. One example of an indirect investment in China is
through the Hong Kong iShare (EWH). It has sizable allocations
to Hong Kong real estate (33%), utilities (17%) and banking
(16%). Having just returned from a trip to Hong Kong, it seems
clear to me that real estate markets have a way to go before
becoming too pricey. Supply is inflexible and even if prices
rise as expected 30% during the next 18 months, price levels
will still be about 50% below where they were in 1997. Being
the last Asian currency pegged to the dollar should encourage
capital inflows. Furthermore, the Hong Kong market has been
much more successful than the Shanghai and Shenzhen stock
exchanges signaling that it will be China's financial capital
for the foreseeable future.
Indirect Currency Play
China's move last week will also increase pressures for a
number of other undervalued Asian currencies to appreciate. To
compete with the China export machine, many Asian countries
have resisted letting their currencies rise but now they have a
bit of room to maneuver. The Malaysian ringgit was released from
its peg to the dollar last week and it rose 0.7% the first day.
While currency appreciation will somewhat dampen export growth
it will also reduce the cost of rising energy import costs and
analysts expect the economy to grow 5.5% this year. The easiest
way to invest in Malaysia is through the Malaysia iShare (EWM)
which tracks a basket of leading companies listed on its
exchange. Another attraction - the annual fee for the Malaysia
iShare is only 70 basis points.
The Play for the Informed
Malaysia is oftentimes overlooked by investors even though it
has progressed quietly but remarkably from a relatively poor
producer of raw materials to a bustling and broadly diversified
middle income country.
Malaysia, positioned along the strategically important Straits
of Malacca , should be on every investors radar screen for the
following reasons:
- It has little external debt and healthy foreign exchange
reserves. In area, it is slightly larger than New Mexico.
- Malaysia has a balanced economy with strong industrial and
service sector, important natural resources and openness to
foreign investment.
- It has a parliamentary system and divided powers between
central government and 16 states and federal territories.
- Malaysia is well situated to benefit from growth in the
region with key export and investment partners being Japan,
China and the USA.
- Natural resources include tin, petroleum, natural gas,
timber, copper, iron ore, bauxite. Small but consistent
exporter of oil and natural gas.
- It has a young and increasingly well-educated population with
a median age of 24 and a literacy rate of 90%.
Malaysia's per capita income is approaching $5,000. Solid
middle-income country with growing middle class.
- The Kuala Lumpur Stock Exchange, also known as Malaysia Bursa
has over 800 companies listed.
Canada?
Another smart indirect China play would be to invest in the
Canada iShare (EWC). The Chinese are going on a buying spree
investing in Canadian energy companies and recently plunked
down $2 billion to build a thousand mile pipeline from Alberta
tar sands to port on the west coast and onward to Beijing and
Shanghai. The Canada iShare tracks the MSCI Canada Index that
has 40% exposure to Canada's energy and materials sector.
Starbucks?
And what about Starbucks (SBUX) as a China play? Starbucks has
about 9,000 stores worldwide and in the first quarter of 2005
its sales were up 27% and revenue exceeded $100 million. It
entered the Chinese market in 1999 and has about 300 stores
that have performed beyond expectations. The company hopes to
expand to 30,000 stores and China is a key part of its
expansion strategy. With 250 million Chinese approaching
middle-class and millions of new affluent status conscious
youth, Starbucks expects that before long China will be its
second most important market. During my recent trip to China
trip, I visited ten Starbucks stores and all of them had brisk
activity with a lot of young Chinese enjoying not only coffee
products but the higher margin specialty drinks. Think the
Chinese will always prefer tea? Japan shows that when income
levels reach certain tipping points, consumer preferences
change from tea to coffee. Starbucks always looks expensive but
many great companies always are. Starbucks investors have made
43 times their investment in its 1992 IPO and revenue was up
27% in July.
China represents an enormous opportunity for long-term
investors but an indirect approach may be the smartest
strategy.
On August 20, 2005 find out what is the next great Asian Bull
Market in the 21st century - hint" It's not China!
Find out more insights at http://www.chartwelladvisor.com
Copyright 2005 Carl Delfeld
Source: http://www.ArticlePros.com/author.php?Carl Delfeld
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