Many seasoned investors are saying that the long term outlook for western economies has never been so troubled. With analysts saying that we should brace ourselves for a recovery that will take at least five years if not ten, a lot of investors will be asking themselves if they need to try a new approach. Specifically, what about investing in China?
Veteran investors like John Templeton were great fans of investing outside of the US. Templeton took the plunge into Japan in the 1960s having watched it with keen interest for many years before that. We all know that China has been doing well and has the fundamentals that should support growth in its economy for decades to come, but few retail investors have ventured into Chinese stocks. For many ordinary investors, it’s still too alien for them.
Investing in Chinese companies needn’t be any different to investing in European stocks. You just need a bit of orientation and to know where to get information to research your stocks.
Which Stock Market?
There are three stock exchanges in China
- Hong Kong
- Shanghai
- Shenzhen.
Hong Kong is the most established market and the most liquid. The chances are that your broker account will already allow you to buy stocks from Hong Kong.
Shanghai is already the world’s fifth largest exchange and in the future will be the one to watch. China’s largest companies and many enterprises controlled by the state have shares listed on this market. There are two classes of shares, ‘A’ and ‘B’. ‘A’ class shares are denominated in renembi and only locals or approved foreign entities can trade in them. ‘B’ class shares are denominated in US dollars and are available to a much wider range of foreign investors. For the time being though, retail investors will struggle to access the Shanghai market. However, most of the widely traded stocks on Shanghai also have listings in Hong Kong or have ADRs that are traded on the NYSE or NASDAQ.
Shenzhen is also a large exchange with a combined market capitalization of $1.2 trillion. However, its companies tend to be smaller, higher risk and almost entirely chinese based. An analogy would be that Shenzhen is China’s Nasdaq, while Shanghai is its NYSE. The exchange also operates the class ‘A’ and class ‘B’ share system. The novice to the chinese market would be well advised to avoid stocks on this exchange to begin with.
Which Sectors?
While the Chinese economy has been booming, some sectors are less solid than others. Property and Construction for example has seen some boom and bust cycles and is currently coming to the end of another bubble. Sectors that are supported by China’s demographics and long term development trends are far more likely to be appealing to western investors looking for long term steady performance
The sectors that could appeal as a consequence are utilities and energy. They are less subjected to pricing bubbles and underpinned by solid demand growth. Every person that moves from the country to an urban environment will need utilities, and as their economic value grows, so will their demand for energy. They are also sectors that are easy to understand wherever you are in the world. The peculiarity of China however is that some energy prices are fixed by the state which can impact financial performance.
Which Companies?
For investors that follow the Warren Buffet and Benjiman Graham school of investing and are after solid long term stocks, a good place to start are the indices compiled by Hang Seng, because their constituents are the region’s bluechip stocks. The most well known Hang Seng index is that of the top stocks on the Hong Exchange. However, Hang Seng also compiles the ‘China A Industry Top Index’ which covers 50 chinese companies which it thinks most represent the performance of commercial China. These companies are mainly listed on the Shanghai stock exchange, but many have dual listings in Hong Kong as well. Research material and news about all of these companies is quite widely available in English.
Keeping up to date
Once you’ve familiarized yourself with these stocks, you need to keep up with business developments in China. At Asian Business Daily we research news about business in China and other Asian countries and pick out the stories that we think would be of most interest to western investors. We try to offer a more granular level of news than might be available through the normal western channels.
Asian Business Daily wishes you many successful investments!
