China Looks Interesting

11/24/2008 12:00 am EST

Focus: GLOBAL

David Fuller

Global Strategist and Producer, Fullermoney

There is a changing balance of power, as we’ve so often discussed in these pages over the last eight years. China has the savings and also a growing manufacturing base. Manufacturing in the USA has been shrinking as a percentage of GDP for decades and this loss cannot be made up by platform companies (Nike (NYSE: NKE) is a good example of these) alone. Consequently the USA needs China even more than China needs the USA.

But what about investment opportunities? As a developing economy, China will always be high beta. However, the USA remains the epicenter of global economic risk. I assume that there will be policy mistakes in China's command economy, as Jeremy Grantham, chairman of investment firm GMO cautioned recently. However the USA is no stranger to policy mistakes.

In terms of selecting investments, Fullermoney will always encourage subscribers to retain the decision making process. After all, no one is in a better position to determine what is appropriate for you, than you yourself.

Therefore this investor can only speak for himself. In terms of capital appreciation, I would much rather invest in the high-growth, high-corporate profits and high-savings economies on the way up, than the slow-growth, lower-profits and low-savings economies on the way down.

But timing is everything. The best time to invest in a favored high-beta market is when it is cheap, and commencing the next recovery. I have done this before with China but my more recent mistake was to become infatuated with the theme. As a consequence and as president Bush said in a different context: I misunderestimated downside risk once China's accelerating stock market index eventually lost upside momentum.

If considering growth rather than yield, many Fullermoney themes tempt me today. However China will probably be my next purchase, suspecting that it could lead the eventual recovery. A recent daily chart of the Shanghai Composite Index shows a potential downside failure, which will be part of the base-building process. The longer-term charts confirm that China is at an interesting level, although the bottoming out process may take time, especially without support from the USA and other influential stock markets.

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