Time to Check on China

01/30/2015 10:00 am EST

Focus: GLOBAL

Now's the time to consider investing in China, argues James Glassman, of Kiplinger’s Personal Finance Magazine. Here, he looks at the long-term outlook for the China region and highlights his favorite stocks and funds for investors to consider.

Steven Halpern:  Our guest today is James Glassman, of Kiplinger’s Personal Finance Magazine. How are you doing today, James?

James Glassman:  I’m doing great, thanks for calling.

Steven Halpern:  In your latest article, you suggested now is the time to buy Chinese stocks, and as background, you recognized that China’s economic growth is slowing, but at the same time, many China-based stocks have declined to more attractive valuations. Could you expand on that please?

James Glassman:  Sure, I mean, there is a lot of concern about China’s growth moving down from the 10%, 9%, 10% a year level, which it was never to maintain anyway, down to 5% to 7%, let’s say, which is still pretty brisk.

I mean, when you think the United States has been growing about 2% over the last several years and maybe we’ll get up to 3%, so it’s still a significant growth rate, but the fact that it has slowed has hurt a lot of Chinese stocks.  

My own feeling is there’s something going on in China which is more important than the growth rate and that is the fact that the economy is becoming much more consumer-oriented and I think that investors should take a very serious look at China for that reason.

Steven Halpern:  So, from your standpoint, it’s a long-term story, not one necessarily for traders?

James Glassman: Absolutely.

Steven Halpern:  Now you pointed three stocks that cater directly to the Chinese consumer, Alibaba (BABA), Tencent (HK: 700) (OP: TCEHY), and China Mobile (CHL). Would you explain the attraction of each of these companies?

James Glassman:  Sure, and let me just tell you what I think is the overall attraction of the three companies, which is that they are all — all three of them— are companies that are mainly catering to the Chinese consumer audience.

Now Alibaba, of course, wants to go much more global, as does Tencent, but right now they are very much focused on the Chinese consumer audience.  

Alibaba, of course, is an on-line shopping mall somewhat like Amazon (AMZN), but actually it’s more like having thousands of storefronts on the shopping mall and actually a much easier company to manage than Amazon is.  

Tencent is an online services company that has instant messaging.  It just made a deal to broadcast HBO programs through mobile units.  It’s a terrific company, it really is.  

Then China Mobile, which is China’s own telecom—major telecom service—and that’s a very good way to play the Chinese market. All three of these companies have actually done fairly well recently, but I believe that—over the long run—they are extremely well priced.

Steven Halpern:  Now you also see investing opportunities in healthcare.  Could you share your thoughts on that sector?

James Glassman:  Yea, now healthcare is a little bit more difficult as far as actually buying individual stocks, although you can do that, but I just want to talk about the sector in general.

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This is where a real revolution is occurring in China.  In healthcare, you’re moving more and more toward private services.  

Overall, absolutely China is going to be overwhelmingly public provider, or large hospital provider, but as in the United States, there are more targeted healthcare companies that are mainly aimed at higher income people and I think that that’s the area to go in.

Steven Halpern:  Now, are there any specific investment opportunities or is this an area you would just suggest that investors keep an overall eye on for now?

James Glassman:  I think you’re better off just keeping an overall eye on this, because at this point, there really are not any companies that are major standouts that are not private right now. What you want to watch for is the development of private hospital change over time.

Steven Halpern:  Now, for many investors a mutual fund might be an easier way to play the China market and one you suggest is Matthews China Fund (MCHFX) and you consider that one of the best. Why?

James Glassman:  Right, I’m a big fan of Matthews China and the reason is what I was saying earlier, this is a fund that is very much oriented toward the China consumer market itself.  

What you find with a lot of the China funds, first of all, there is a skewing toward Hong Kong based companies, as well as toward export-oriented companies.  

What I’d rather do is invest in funds that concentrate on Chinese companies alone, so Matthews China, for example, owns a stock called Cafe de Coral, which is just, basically, a fast food chain that’s slightly upscale from a fast food chain with dozens and dozens of outlets in China.

They own companies that produce milk and dairy products in China.  I really like Matthews a lot.

Steven Halpern:  Now, you also point to the Oberweis China Opportunities Fund (OBCHX).  What’s the attraction with that?  I believe they focus more on small-cap-type opportunities.

James Glassman:  Right, exactly.  This is very similar to Matthews China, but a focus on smaller companies, like there’s a company that they own called Vipshop (VIPS) which is an online discount retailer.  

The problem with Oberweis is that it does have a very high expense ratio, 2.07%. Generally, if it were an American fund, I wouldn’t even be paying an attention to it with an expense ratio like that, but it’s actually done incredibly well, has doubled its shareholders money over the last three years.

So, obviously, a 2% expense ratio is not so bad. Now, they’re not going to do that every three years, but I think it’s definitely worth taking a very close look at.

Steven Halpern:  Well, we appreciate you taking the time to join us.  Thank you.

James Glassman:  Thank you.

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