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Invest Style

China's stimulus spurs investing options

Investment fund managers have been beefing up their allocations to China since the fall

The art of ignoring the pendulum's swing

BY CHERYL DEVOE KIM
Globe Investor Magazine Online, March 30, 2009

The S&P 500 and the S&P/TSX indices are poised to post their first positive monthly returns of the year, but emerging market indices started climbing last fall. Brazil's iBovespa has gained 42 per cent from its October low, Chile's Indice de Precios Selectivos has climbed 26 per cent, and China's FTSE Xinhua 200 index has gained a stunning 54 per cent.

But it's not too late to get in on the action, emerging-markets watchers say. In the case of China, an aggressive stimulus plan - combined with a burgeoning middle class - make investing there attractive.

The Chinese government has a four trillion yuan ($726-billion) plan to bring economic growth back up to the heady levels of 8 per cent, although exactly how that money will be spent, and how much of it is new money is a little murky.

"But it doesn't matter," said Erik Nilsson, senior international economist at Scotia Capital Inc. "The government is going to spend whatever is necessary to crank the economy up."

And if you accept the premise that stock market returns are linked to the growth of an economy, then China will be a global leader in the medium to long term, he said.

The 44 Chinese companies and numerous exchange-traded funds listed on the NYSE can be purchased in the same fashion as U.S. stocks, making it easy for Canadian investors to add some exposure to China in their portfolios.

China Mobile Ltd. CHL-N is a favourite of Bob Gorman, chief portfolio strategist for TD Waterhouse in Toronto. China Mobile, the country's largest mobile phone provider, reported 6.75 million net new subscribers in February, bringing its total to almost 471 million subscribers, out of a population of about 1.3 billion people.

With about three-quarters of the Chinese market, and a strong balance sheet, China Mobile is much stronger than its competitors, Mr. Gorman said.

And with the cellphone ownership rate in China at a relatively low 46 per cent, the potential for growth is strong, he added. "If you are looking for high-calibre play on the long-term China growth story, this is a pretty good one," Mr. Gorman said. Like China Mobile, insurance provider China Life Insurance Co. LFC-N will capitalize on the growing middle class, Mr. Gorman said. The company's stock, like other insurance companies worldwide, has been hit hard in recent months due to its exposure to financial markets.

"Having said that, future prospects are good if you think about insurance as a consumer product, one that they start thinking of once they get past the subsistence stage," Mr. Gorman said.

Last week, the company reported a 21-per-cent increase in premiums and policy fees in 2008 compared with the previous year. For investors who can't sufficiently diversify their investment in China with individual stocks, Mr. Gorman points to the iShares FTSE/Xinhua China 25 Index Fund, which holds the largest 25 Chinese shares by market cap.

Its top holding, incidentally, is China Life followed by China Mobile and Bank of China Ltd.

Investment fund managers have been beefing up their allocations to China since the fall, according to data from EPFR Global, which tracks fund flows between countries. Among funds mandated to invest globally across emerging markets, average weightings for China rose to 15.4 per cent at the end of February from 11.4 per cent at the beginning of October.

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