China Effect and Investing
Last week, when I was in Cardio-Med, waiting for the forever-late doctor to discuss my Heart Scan results, I read the Fortune Magazine’s Special Edition: Red China. I have noticed that several books were published recently about the dramatic economic growth in China. This Fortune Magazine finally stroke me: it hit the main stage. Now everyone knows.
So now, it is official. Everyone in the US and other developed countries has to face the issue: China is becoming an economic power house. Since 1980, China has been growing in an astonishing rate of average 9.3% annually. There has never been any country in the history of mankind that ever grew at this rate for so long. It has been predicted that, in 35 years; China will pass US in GDP and become the biggest economic country in the world.
There are some smart guys figured this out years ago. Jim Roger, the previous partner with George Soros in the Quantum Fund, wrote in his excellent “Adventure Capitalist” that “21the century will belong to China…..I will let my children learn how to speak Mandarin”. Roger also pointed out at the end of his book that the commodity boom has already begun, although he didn’t mention any direct relationship between China and the commodity prices. Another smart economist/analyst Marc Faber, who wrote a fabulous book called “Tomorrow’s Gold”, in which he not only mentioned the commodity bull market, but also analyzed the inherent reasons for the global commodity bull market in the coming years.
I still remember clearly that I was specially intrigued by Roger’s commodity comments when I listened to his book late last year in the audio CD. But I didn’t do anything about it, mostly because I didn’t know how to play the commodity market. I heard of the future market but it is too risky. Again, I sensed that something was there, but failed to take suitable actions. I read Faber’s book a couple of months after I heard Roger’s CD, and wished that I had read them earlier, when it was published at the end of 2002 by CLSA in Hong Kong.
The logic is actually quite obvious. China has been growing fast by selling merchants to US and other countries. Chinese now have some money and they want to buy goods. There are 1.3 billion people there. The consumer market is huge. Chinese want all the staffs that Americans have: cars, TVs, washing machines, nice cloths, etc. All these goods consume basic materials like alumina, copper, steel, cotton, oil, etc, which drives the commodity prices upward. Developed countries like US, already passed the stage of requiring “goods”, and more toward the services like medical and financial services. When the majority of the people already have one car, two TVs, and three telephones, it doesn’t make much economical sense to replace them often. Therefore, the growth rate of the consumer markets in US is stabilized, the growth is mostly driven by the new technology/new products entering the market.
It seems that best way to invest for this China effect is through the commodity market, instead of directly buying stocks of Chinese companies. Commodity had been in a long-term bear market from 1980 to 2002. It may not be too late now to enter it. Faber believed this commodity bull market would go on for 10 years. Roger has set his own commodity index. The question for a small investor like me, who only has experience in investing stocks and mutual funds, is: what kind of investment vehicle should I use?
ETF (Equity-Trade-Fund) is one option. There are some ETFs that are focus on energy and natural resources, such XLE, XLU, and IYE. But they are not direct enough. Individual stocks are too narrow to capture this broad trend. Among all the stocks in my current accounts, OSG performs the best. Shipping companies have been doing very well because China has to bring all the materials around the world to its own places. The prices of oil and gas will stay high for sometime because manufacturing and shipping consume lots of them. I still need to look at future contracts and options; maybe they are not as risky as I think.
There are two kinds of investors (doesn’t matter if you are institution investor or individual investor): one is trend-follower, and the other is “trend-discover”. The “trend-discover” is also called “contrarian investor” (such as Warrant Buffer, Marc Faber, and Jim Roger) because he looks for the stocks or commodity when most of the people omit them (so the prices are low). The “trend-follower” waits for a trend to form, then follows the trend until it reverses. So far, I am in the follower group. I guess that I started to evolve to the discover group since I have not heard anyone in the flower group made the “richest people in US” team yet.
