It is Time to Take Your Portfolio to China

By Jim Woods

The latest China growth figures are in — and I’m ready to buy.

We received data from officials in the world’s second-largest economy last week showing that gross domestic product (GDP) came in at an annual rate of 7.4% in the third quarter. That figure is down 0.2% from the previous quarter, and is the slowest pace of growth since Q1 2009.

So, why does this number make me ready to buy Chinese equities?

Well, on its own, the 7.4% growth is pretty good, especially when compared to anemic GDP growth here in the United States of just 1.3% in Q2. China’s growth also is amazing, considering Europe still is mired in recession. Yes, China’s growth is decelerating, and that’s been read by many pundits as a reason to jettison stocks pegged to the Dragon’s fortunes.

But hold on a moment. If we drill down a little deeper into the China numbers, we see some encouraging metrics. First, we have industrial production, which surged some 9.2% over the prior year, and 3% from the previous month. There also was a big jump in retail sales in the country of 14.2% vs. the prior year. That number also represents a 1% climb from the August figure. Finally, we saw that fixed-asset investments rose a better-than-expected 20.5% year-to-date.

These numbers, and particularly the retail sales number, confirm the China bull thesis recently proffered by my friend and Eagle Publishing investor advisor Doug Fabian. In the November issue of his Successful Investing newsletter, Doug wrote, “By far, the biggest fundamental driver that’s set to fuel China, and the emerging markets tied to her fortunes, is the incredible rise of China’s middle class. According to some estimates, China’s middle class — defined loosely as those with annual incomes of between $10,000 and $60,000 U.S. dollars — now tops 300 million people. That means that China’s middle class alone is larger than the entire population of the United States.”

Judging by those retail sales numbers, the middle class in China has been hard at work shopping, and that has strong ramifications for a whole lot of stocks tied to the China thesis.

One way to get at many of those stocks is via an exchange-traded fund (ETF) like the Global X China Consumer ETF (CHIQ), which is pegged to an index of companies that provide goods and services to Chinese citizens. Another great way to gain exposure to China is via the iShares FTSE China 25 Index (FXI), a fund that can be considered China’s version of the Dow Jones Industrial Average. Given the rise in industrial production numbers we just received, the stocks in FXI should see a nice push to the upside.

Now, these two ETFs certainly aren’t the only ways to buy into China. Another way to do so is to buy stocks of the companies that Chinese consumers love. Here we are talking about stocks that represent what I call the China luxury trade.

Chinese love brands and anyone who has ever visited Beijing or Shanghai knows that status-conscious Chinese love to flaunt their newfound wealth. They do so via goods like handbags from Coach (COH), iPhones from Apple (AAPL) and even beverages from Starbucks (SBUX). These Chinese luxury favorites also are a way to play the boom in China’s middle class, and without actually venturing into China with your portfolio.

The bottom line here is that despite the much ballyhooed China bear thesis that’s captured popular opinion over the past year or so, there remains plenty of positives for China’s economy, and for stocks tied to her fortunes. If you’re looking to put money to work internationally, it’s time to take your portfolio to China.
Follow Jim on Twitter: @Woodsish.