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Fund Favorites for China

02/17/2006 12:00 am EST


Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

When considering China, many investors think of low cost manufacturing. But Mark Skousen notes that China  recently passed the United States in information technology exports. Here, he reviews the situation and offers a pair of funds to invest in China's future growth.

"Since the beginning of the technology revolution - whether you start with the telephone, the television, the computer, or the Internet the US has dominated in the production and export of technology and telecom goods. As late as 2003, it was still #1 in the world. But a few two months ago, at the latest World IT Summit, the banners highlighted the names of Huawei and ZTE, China's telecom-equipment powerhouses. These are not your typical household names, but this suggests it may be time to start learning Chinese.

"China’s informational technology exports have now surpassed the US in exporting the most technology products around the world, according to new figures from the OECD. It happened last year, when China exported $180 billion in computers, mobile phones, and other digital equipment. (America's IT exports reached $179 billion.). China is, as everyone knows, a major center of low-cost manufacturing. But China's trade in tech wares has been growing at an astonishing 32% rate since 1996. And while its market share has been rising sharply, America's continues to fall.

"But investors need not lose sleep over the now awakened Chinese bear. In fact, there are plenty of profitable opportunities for the investor who wisely looks to diversify his portfolio with Asian stocks. The whole Pacific-Asia region is exploding in growth, at 8%-10% rates. And stocks are earning double-digit gains. Even China, following a bearish two-years in its stock market, is coming alive this year. So the question for investors is how to profit.

"The answer is to consider these two funds. The best way is to invest is in closed-end funds, such as the China Fund (CHN NYSE) and more broadly, the Morgan Stanley Asia-Pacific Fund (APF NYSE), one of my longtime favorites. For years, the China Fund was selling at huge premium to net asset value (NAV), sometimes exceeding 30%. The premium has since come down to 15%, making it a fairly good value. The fund is already up 13% in January. The Morgan Stanley Asia-Pacific Fund is more broadly invested, including Japan (which was up 40% last year), and is still selling at a huge 10% discount to NAV.

"Jeremy Siegel, professor of finance at the Wharton School and author of the classic Stocks for the Long Run , is not known for his hyperbole. But here's what he wrote recently: ‘China and India are setting the stage for the greatest period of discovery, invention, and technological change the world has ever known.’ When Professor Siegel speaks, I pay attention. What's driving the Asian revolution? The knowledge economy, as the late Peter Drucker called it. That's why I'm more bullish on China and the entire Asian region than any other place."

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