Global Markets: The Far East - Stock up on red chips

Ken Welsby on what the future holds
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While television news teams are roaming Hong Kong asking anyone and everyone what they believe the handover to China will mean, most big investors and fund managers are confident that, at least in matters financial, they already know the answer.

"Over the past 18 years China has sought to emulate the economic and business culture of Hong Kong," says Nerissa Lee, investment director of Guinness Flight Hambro in Hong Kong. "Hong Kong has never moved an inch in the direction of mainland culture and, in my opinion, the most likely consequence of the handover is an acceleration of the pace by which China becomes more like Hong Kong."

Guinness Flight Hambro operates a series of funds which invest in the Far East, with increasing emphasis on what analysts now term the Greater China region - Hong Kong, China and Taiwan. It was created by last month's combination of the specialist fund manager Guinness Flight with Hambros fund management business. Although described publicly as a merger, the deal was seen in the City as a GF takeover. The new group has pounds 11bn of assets under management, of which more than pounds 500m is invested in Asia.

The Chinese economy is expanding rapidly. Ten years ago fewer than one urban household in 100 owned a colour television or a refrigerator and only one in six had a washing machine. Today the figures are 70 in 100 for televisions, 80 for washing machines and 50 for refrigerators.

Although the flow of funds into companies quoted on the Shanghai and Shenzhen stock exchanges is accelerating, most investment is channelled through the "red chips" in Hong Kong. These are companies which are quoted in Hong Kong but controlled by mainland Chinese corporations. One of the most successful is Citic Pacific, which has stakes in Cathay Pacific and Dragonair, Hong Kong Telecom and mainland power and utility businesses. From a standing start in 1990 its market capitalisation is now more than pounds 7bn.

Some fund managers are still reluctant to invest directly in mainland stocks, but Ms Lee and her colleagues say that because of the nature of the market the key to successful investment in China is individual stock selection.

While Hong Kong is go-go-go, it's a different story in Tokyo. For most investors, Japan has been little short of a disaster over the past seven years since the economic bubble burst. The Nikkei 225 index of leading shares, which reached 38,915 in December 1989, closed last night at 20,385. But that does not mean investors should ignore Japan's potential. It's a matter of picking the right stocks, according to Paul Kelly of Global Asset Management, which has launched Britain's first open-ended investment company (Oeic) to invest in Japan.

Mr Kelly's investment approach has paid off for investors in his Tokyo fund, which has grown some 97 per cent in five years. He pays no attention to index weightings and other strategies which are followed by fund managers. If he finds a sector in which there are shares with good prospects he will invest heavily, and if the reverse is true he avoids it.

Open-ended investment companies, or Oeics, are a new kind of managed fund that could largely replace unit trusts over the next few years. An Oeic is a company instead of a trust, so you buy shares instead of units, and there is a single price, the net asset value per share, rather than the bid/offer spread with unit trusts.

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