The United States may have been in a recession with negative economic growth since December 2007, but China still expects to hit its economic growth target of 8 percent in 2008. Meanwhile, the country joined with leaders of South Korea and Japan in the first Asian economic summit designed to explore ways to help the region play a role as the center of world economic growth.
Despite the positive growth, the Chinese stock market has plunged more than 60 percent so far this year, compared to a 39 percent drop in the U.S. stock market. China may not have experienced single digit economic growth for six years, but the country's economy is still quickly expanding as many western economies head into recession. So, how can investors take advantage of this differential?
China Mobile Ltd.
With over 399.5 million subscribers, China Mobile Ltd. (CHL) is the largest provider of mobile telecom services in China with service in 31 Chinese provinces, autonomous regions and directly administered municipalities in Mainland China and Hong Kong. Currently, the firm is trading at a price-earnings multiple of 13.87x despite posting 44.7% quarterly growth, according to Yahoo! Finance.
Surprisingly, the earnings multiple for China Mobile is lower than that of U.S. counterpart Verizon Communications (VZ) despite a sharply higher growth rate, high profit margins, and larger potential market. In fact, the majority of Verizon's mobile growth in recent times comes from its recent acquisition of regional mobile provider Alltel, while China Mobile's growth is primarily organic.
Baidu.com, Inc.
The internet search boom may have been put on hold in the United States, but Chinese online search (and internet usage) is just getting started. The state-run China Internet Information Center reported earlier this year that China had surpassed the United States as the nation with the largest number of internet users. In fact, China increased its internet users in one year by 73 million while the total number of U.S. users is estimated to be just 215 million.
Baidu.com (BIDU) dominates the Chinese search market the way Google (GOOG) dominates the U.S. market. The firm has over 60% market share and even Google admits it would be difficult to compete. Google's Kai-Fu Lee noted, "Gaining share against a well-established supermajority competitor is a difficult proposition because there is a certain critical mass, economy of scale and word-of-mouth effect that one has to overcome."
Baidu.com is currently trading with a price-earnings multiple of just 27.79x despite its strong 91.4% quarterly growth, according to Yahoo! Finance. This compares to Google's 19.87x earnings multiple with quarterly growth of just 20.6%. China also has a positive economic growth, which comes in sharp contrast to the United States where Google operates.
iShares China ETF
Investors looking to place a bet on the broader Chinese economy may want to take a look at the iShares FTSE/Xinhua China 25 Index (FXI) ETF. The fund holds the top 25 largest Chinese companies, including China Mobile, PetroChina (PTR), China Construction Bank (CICHF.PK) and other large names. Currently, the entire index has a price-earnings ratio of just 8.42x despite continued growth in the Chinese economy.
For 26 years, at the start of each year, I've conducted an annual survey of newsletter advisors, asking for their favorite investment for the coming year. Until 2 or 3 years ago, their responses were almost always individual stocks and an occasional mutual fund.
Increasingly in recent years, many advisors have found their favorite positions to be exchange traded funds, whereby they can invest in a sector, region, or strategy without the inherent risk of an individual company. Indeed, in this year survey of 75 advisors, fully 1 out of 5 advisors chose ETFs.
ETFs were a popular choice for those seeking global exposure. Mark Salzinger, editor of The Investor's ETF Report, selects the S&P China SPDR (NYSE: GXC) as his favored play. (Read the full article here.)
Nick Vardy sees opportunity in China, but also sees potential in a broader range of emerging global markets. The editor of Global Stock Investor looks to the iShares MSCI Emerging Markets (ASE: EEM) as his top idea for 2009. (Read the full article here.)
Carl Delfeld of Chartwell Advisors also wants to own a basket of emerging markets stocks, but only small caps. His pick is the WisdomTree Emerging Market Small Cap (NYSE: DGS). (Read the full article here.)
Jim Lowell takes a similar view -- chosing global small caps -- but adds a further restriction. His recommended ETF limits its holdings to dividend paying stocks. Hence, the top pick in his Marketwatch ETF Trader is the WisdomTree International Small Cap Dividend (NYSE: DLS). (Read the full article here.)
ETFs an also be used to play a specific sector, such as consumer stocks. Leonard Goodall sees upside in companies making the "basics" such as soda, toothpaste and soap. In his No-Load Fund Investor, his top way to play this trend is the Consumer Staples ETF (NYSE: XLP). (Read the full article here.)
In addition to using ETFs to invest in a region, country or sector, these vehicles can also be used to invest in a certain strategy. For example, Tom Bishop, editor of BI Research, chooses the PowerShares Value Line Industry Rotation ETF (NYSE: PYH), which rotates its holdings to only include stocks that earn Value Line's top investment rating. (Read the full article here.)
Doug Fabian, editor of Successful Investing, looks to PowerShares DB Crude (NYSE: DXO), an exchange-traded note. While this leveraged position goes up twice as much as the underlying index when it rises, it also goes down twice as much when the index declines. (Read the full article here.)
Paul Tracy, editor of StreetAuthority Market Advisor takes a similar approach, but rather than speculate on the price of oil and gas, he looks to ProShares Ultra Oil & Gas (NYSE: DIG), which invests in a basket of stocks operating within these sectors. (Read the full article here.)
The most popular choice in this year's survey was ETFs investing in gold. Both Vivian Lewis, editor of Global Investing, recommends the SPDR Gold Trust (NYSE: GLD); it's price reflects 1/10th of an ounce of gold. (Read the full article here.)
Mary Anne Aden, editor of The Aden Forecast, also selects the SPDR Gold Trust (NYSE: GLD) as her top investment ideas for the coming year. (Read the full article here.)
Mark Leibovit, market timer and editor of VRTrader, holds a long-term bullish view on gold and opts for upside leverage. His top pick is the PowerShares DB Gold Double Long (NYSE: DGP). (Read the full article here.)
Pamela Aden, co-editor for The Aden Forecast, also sees upside potential in gold but prefers to invest in the companies that mine for the precious metal. Her top pick is the Market Vectors Gold Miners (NYSE: GDX). (Read the full article here.)
For greater leverage (and higher risk), Steve Rawls, editor of Tipping Point Stocks, suggests the ProShares Ultra Gold (NYSE: UGL), which moves twice the rate of the underlying London gold price. (Read the full article here.)
Mike Larson, editor of Money & Markets, sees downside risk in financial stocks. But rather than try and select which stock might fall, he opts for a basket of financial players with the ProShares Trust Short Financials (NYSE: SEF). As an "inverse" fund, this moves in the opposite direction of the underlying index. (Read the full article here.)
And for even higher risk and volatility, Michael Shulman, editor of ChangeWave Shorts, looks to the ProShares UltraShort Financials (NYSE: SKF), an inverse double fund. Not only does it move in the opposite direction of financial stocks, but it moves twice as much.
"My top investment recommendation for 2009 is the SPDR S&P China ETF (NYSE: GXC)," says Mark Salzinger, exchange-traded fund expert and editor of The Investor's ETF Report.
"I recognize that this is an aggressive, risky choice. However, the Chinese economy boasts some impressive strengths, and, after falling by at least half in 2008, Chinese stocks are trading at very low valuations.
"China has approximately $2 trillion in U.S. dollar reserves, which it can use to buttress economic and political stability in the country. Also, even with a much reduced economic growth rate in 2009, China still will be a huge importer of oil and many industrial commodities.
"That means China will benefit greatly from lower prices for these products, some of which have lost two-thirds of their value just since May 2008.
"Compared to its main competitor, the Ishares FTSE/Xinhua China 25 Index ETF (NYSE: FXI), the SPDR S&P China has a lower expense ratio (only 0.60%, vs. 0.74% for FXI) and a much broader portfolio (126 holdings, vs. 25).
"Financial-services stocks account for a lower percentage of the SPDR's assets, while technology and consumer stocks account for higher percentages.
"This probably makes the SPDR S&P China more sensitive than FXI to Chinese domestic demand, rendering my recommendation more attractive during a period in which China's own economy is likely to do better than that of the world at large."
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