Buy UK stocks if shopping for China growth opportunities
Investing in the East can be easier if you look home first.
Saturday 07 August 2010
if your financial adviser suggests sticking a chunk of your cash in China, don't be surprised. According to a survey of advisers published this week by Baring Asset Management, two-thirds believe that investors should increase their exposure to emerging markets, of which China is the stand-out region.
"Asian equities are highly favoured as the economies in the region are booming from increased consumer spending," points out Ian Pascal of Barings. "Over time, consumer spending is set to increase as wages rise, particularly in China."
He's not the first to talk up China. It has been mooted as the investment opportunity of the year from several quarters and there's no doubt that the country is showing positive signs. Indeed, China has shown consistent growth of 9 per cent over the last 30 years and has just taken over from Japan as the world's second largest economy, boosted recently by the Beijing Olympics and the Shanghai World Fair.
There are a range of funds investing in China, including Jupiter China, First State Asian Pacific Leaders, and Melchior Asian Opportunities, as well as Fidelity's recently launched China Special Situations fund run by the veteran manager Anthony Bolton. But people wary of investing in a region where they have little knowledge can still benefit from the potential boom in the country by investing in FTSE shares.
So says Aruna Karunathilake, manager of Fidelity's UK Aggressive fund, who has just returned from a three-week visit to China, his fifth in the last half-decade. "The FTSE is profoundly international with 70 per cent of revenue derived from outside the UK. Those companies that are going to prosper in the West are likely to be those who can sell to the Chinese and other Asian nations," says Aruna.
He was joined on the trip by Tom Ewing, who manages Fidelity's UK Growth fund, and Ewing says that it's entirely logical for UK fund managers to be interested in China. "The bulk of the growth of the big companies in the FTSE such as Diageo, Rio Tinto, Shell or Tesco is coming from emerging markets, and a really important part of that is China," he says.
"As fund managers we're excited by growth and – however kind we want to be about the coalition and what they're doing – the UK doesn't look exciting, especially when you look at consumer confidence and house prices and so on. China does look exciting, but it's only by visiting the region that you get a feel for opportunities and can be objective."
The pair have both in the past visited the main Eastern cities of Beijing and Shanghai and seen them grow from being almost building sites to fully realised modern cities. Their more recent trips have taken in some of the more remote regions which have helped to persuade them that China's growth story is set to continue for a good few years yet.
"The growth is only just beginning in China. The successful model in the Eastern cities is being migrated across the country," says Karunathilake. "Big successful companies are moving inland to where labour costs are lower and in their wake is coming more building and progress and prosperity across the country."
The progress has been aided by a stimulus package begun by the Chinese government in 2008 which has seen central investment focused towards remote areas. That's partly for political reasons as the nation's leaders are well aware of the social unrest caused by the imbalance of having massive prosperity in some cities while millions still live frugally. In short, the government has promised to bring the good times to all.
"Manufacturing has been built on labour in coastal cities and near the ports but this is starting to change," says Karunathilake. "As infrastructure improves, goods can be transported from inland factories to the ports. Migrant workers are agitating for more rights and as wages rise, it is cheaper for companies to move inland. Also, the coming generation of workers have grown up with the internet and are aware of life beyond 75 hours a week in a factory. They may not want to leave their home to become a migrant worker, so the factories are now coming to them."
Tapping into that potential through investing in UK funds is a great way to benefit from other growth areas across the world, says Ewing. "By investing in big global companies with their headquarters in London or the UK people get diversification as well, as there's exposure to interesting emerging market countries such as Nigeria or Brazil. Indeed our next trip is likely to be to Brazil to find out more about the boost that oil will bring there. But UK stocks also bring reassurance through better accounting and disclosure. A listing on the FTSE implies a decent degree of corporate governance," he points out.
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