China: One Big Market... and a Still-Huge Opportunity

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club

Global equity investors can hardly be blamed for feeling a little down at the mouth lately.

The U.S. economy isn’t growing fast enough to absorb new laborers entering the workforce. Europe has even bigger problems with countries like Spain and Greece in full-blown depressions and the future of the 17-nation euro a question mark. And emerging economies from Latin America to the Pacific Rim are ratcheting down expectations due to softness in their leading export markets.

However, it would be a mistake to overlook the world’s great emerging behemoth: China.

Although GDP growth there has slowed from the heady 10% annual rate of the past few decades, China is still the world’s fastest-growing major economy and – get ready – it will be the world’s largest in less than 10 years.

I know. You’ve heard the concerns about real estate prices and overly optimistic construction activity in China. But there’s little chance of that country experiencing the real estate boom and bust that occurred in the U.S. and Europe.

Vacant space is filling rapidly in China. And, as hundreds of millions more people are expected to move from rural areas to the city, this won’t change any time soon. And unlike the U.S., where consumers bought homes with little or nothing down, Chinese buyers make minimum down payments of 40% on a first home and 60% on a second home. People who do this don’t mail their keys in to the bank.

During boom times in the U.S., the savings rate dropped to zero. And then went negative. Not so in China. The average citizen saves a third of his income.

And whereas the U.S. is rapidly reaching the point where the national debt will soon equal the size of the economy, China has a debt-to-GDP ratio of just 17%. That gives it plenty of room for fiscal stimulus if necessary.

Meanwhile, Chinese stocks are extraordinarily cheap on both an earnings and a price-to-book basis. There are two relatively low-risk ways to play this – and both come with a decent dividend attached.

The first is to buy the widely followed iShares FTSE China 25 Index Fund (NYSE: FXI). It holds a broad selection of China’s biggest and most profitable companies, including China Mobile, China Life Insurance, CNOOC, China Construction Bank, and China Petroleum. The average holding sells for just eight times earnings and only 20% more than book value. The average company in the S&P 500, by comparison, sells for more than 13 times earnings and two times book. Plus, you’ll collect at 2.8% dividend yield here.

Another diversified play on China is the Guggenheim China Small Cap Fund (NYSE: HAO). Here you’ll gain access to smaller and faster-growing companies in China. Hence the potential – as with small caps in the West – is even greater. The average company in this fund sells for nine times earnings and sells at a slight discount to book. You’ll collect a 3.3% dividend here.

You don’t need to go overboard here. No one would argue that China is not without its unique risks. But it also the world’s biggest development story with extraordinary opportunities for growth and income, too. These funds are lower-risk ways to capitalize on it.

Good Investing,

Alex

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Put the Pedal to the Metal...

Alex has had his eye on China for a while now.

Back in April, Alex launched his Pacific Advantage Alert, after discovering an incredible development in the Pacific Rim region.

Although the service doesn’t focus primarily on China – rather all of the Pacific Rim region – many of the companies he’s recommended have come from the country.

And today he shared one that’s not only a play on China’s growth, but also as a commodity producer The company is set to benefit from the recent stimulus measures in the United States and Europe.

The stock is Aluminum Corp. of China (NYSE: ACH), and as I write this on Friday morning the stock is up more than 6% from its Thursday close. Note that the company is also trading at less than 75% of its book value. And according to Alex this is just the beginning, as he expects much more from the company.

Here’s what he told his Pacific Advantage Alert subscribers:

“Much ink has been spilled about the fact that China – which has experienced 10% GDP growth for most of the past three decades – is likely to see growth of only 8% this year.

“That’s a significant drop, to be sure. But business owners in most countries could only hope and pray for that kind of economy.

“Asian stock markets have undergone a significant correction based on this forecast and that has caused a lot of great companies to crater, often to levels that are breathtakingly cheap.

“Aluminum Corp. of China, better known as ‘Chalco,’ is one of them.

Based in Beijing, Chalco is China’s largest aluminum producer and the world’s second largest. It’s 8% owned by Alcoa, the top global aluminum maker.

“Aluminum, of course, is a metal lighter than steel, resistant to corrosion and high in electrical conductivity. As a result, it’s widely used in applications such as construction, power, packaging and autos.

“Chalco supplies the material for everything from cars to factory equipment to aluminum foil. In fact, the company supplies 70% of all alumina products consumed in China. (However, Chalco is more than just a pure play on aluminum in China. The company also manufactures and sells mechanical equipment, ceramic products and a variety of electronic products.)

“Due to recent negative earnings and the correction in Asian markets, Chalco is scraping along the bottom, close to its 52-week low. This has caught the eye of famed money manager and Forbes 400 billionaire Ken Fisher, a recent advocate of the stock. He no doubt recognizes that Chalco is now so cheap it sells for 71% of book value and only 24% of sales.

“And, bear in mind, while earnings were negative in the most recent quarter, revenue – which surpassed $23.4 billion over the past 12 months – surged 19% last quarter.

“I estimate Chalco will earn $1.75 a share next year. That makes the stock a bargain at its current ratio of just six times prospective earnings.”

**Registration is currently closed for Alex’s Pacific Advantage Alert service, however, Alex told me today that he plans on re-opening the service for registration sometime next week. Stay tuned as China and its Asian neighbors will be offering some of the world’s greatest growth plays in the coming years – and as always, Alex will be right on top of it all.

– Justin Dove with Alexander Green

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