The long term offers promise,but the next five years are key.
For a country whose stock market accounts for less than half of 1 percent of the world's total,China is getting a lot of attention from US investors.At the same time,a sharp divide is emerging over the way the world's money managers ses opportunities in the country.
Several companies this year have launched China funds-John Hancock and Oberels among others-as retail investors show an increasing willingness to put money into the country's stock market.The HK stock exchange is heading for a record year in the number of initial public offerings launched.
Despite the Chinese market-as measured by China A shares-being down bymore than 9 percent each year over the past three years,most big international fund managers are overweight in China stocks,betting the country's huge growth rate will pay off.But there is a strong core of managers who are under weight,pointing to the country's history of great promise with little delivery.
Interestingly,stockpickers-managers who concenctrate on finding good individual stocks rather than taking a top-down approach-show more enthusiasm for the country than those who focus on the big picture.And although China is usually portrayed as a growth story,value managers are making their presence strongly felt.
Guang Yang,who manages the Templeton Global Opportunities fund,says more than 6 percent of his fund is in China stocks,reflecting the number of bargains Templeton is finding and China's potential as a consumer market.
" China is a demand story,not just a supplier and exporter.The domestic demand for all sort of goods from raw materials to electricity is very strong " he says " It is the second biggest economy after the US,based on purchasing power."
Templeton,traditionally thought of as a value manager,holds China Mobile,the biggest cellphone company in the world by the number of subscribers growing at 15 per cent a year-there is a severe shortage-making power companies an attractive investment.Shanghai Electric,he says," has a very strong order flow and is fully booked until 2008."
LIke Templeton,Nicholas-Applegate,which manages the John Hancock International Fund,another fund overweight in China stocks,believes Chinese oil companies will benefit from growing demand for energy and power " They have greater growth rates than their international peers.They will double power production over the next three years " says Linda Ba,a senior vice president at Nicholas -Applegate.
The firm hold shares in China Shenhua,as well as Petrochina,the country's biggest oil and gas producer in which Warren Buffett also owns a 1.3 per cent stakes.
Nicholas Applegate also owns shares in Foxconn International which manufactures handsets for Nokia and Motorola and had an IPO lat year.
Richard Driehaus,a veteran growth manager,is more bullish on the Asian markets than on the US,and says of China's critics " They are right on the macro,and wrong in the detail...China is a vast consumer market,and there is no doubt it will show real,organic growth .It has been difficult to play for most money managers,but there is no reason not to do indirect plays,or special situations " For example,Mr Driehaus recently bought into the IPO of China's Focus Media.whose business is instore anf flat panel advertising .He has been adding to his stake recently.
"This format is beginning to eat into television advertising .Its utilisation is at 100 percent,and it makes a profit " he says.
Guangzhou RF,a HK-listed homebuilder,is another "special situation " he owns.Rudolp Riad-Younes,head of international equities at Juliu Baer and a prominent emerging markets manager who runs a hefty $ 30 bn,is defiantly bearish on China in the short term,likening its IPO boom to the recent dotcom boom.His funds are heavily underweight, " There is a high risk of disruption in the China equity market,and there is going to be a big correction," he says.
"There is an imbalance with over-investment in China and over consumption in the US,and when the US addresses this imbalance,as it appears it is beginning to,there will be a correction for China.This will affect the local economy.It is similar to the dotcom boom,many of these companies are listing with collapse once that support goes."
Mr Younes sees very little opportunity for equity investors in China,but expect real estate and commodities to be good investments."When you buy into China,you are buying into a concept rather than a real investment.The long term might be a different story,but an investor need s to feel confident over the next three to five years." he says.
Some do,Wendell Perkins,who runs the Johnson Family $ 95 m International fund,which is overweigh in China,owns China Mobile,along with Asia Satellite,and recently swapped a holding in CNOOC for another oil company,Sinopec.He says " There are a number of things that are different this time around,reforms that seem to be long term.The banking system is vastly better,there is their membership of the World Trade Organization and the enormous trade taking place not only with the US but also with Europe and Latin America.
"The intergration taking place between China and the rest of the world is hard to reverse."
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