How the yield curve can suggest the next recession, the amazing volatility of bitcoin, and three ris...
China: Threat or Opportunity?
10/31/2003 12:00 am EST
Donald Straszheim, former chief economist for Merrill Lynch, and principal of Straszheim Global Advisors, sums up his market outlook very succinctly. He says, "China is changing the world." Here he outlines the best investment opportunities–and the risks.
"China is careening down the path toward a market economy. There is a long way to go, but there is no turning back. Every company in the world realizes now that China is either a threat or an opportunity–or both. They are a threat in the sense that their competition is going to go to China and undercut them in price by producing there. It is an opportunity in the sense that they can go to China and produce there and cut their own costs. It is an opportunity that they can go there and sell into that market. Fast forward to 2008, and ask the CEO of virtually any company in the S&P 500, 'What was the biggest force for change in your company’s performance in the last five years?' I would hazard a guess that the answer from most with be ‘China’–from one perspective or another.
"The biggest risk by far in China is the banking sector. Banks in China are called commercial banks, but they are not commercial banks. They are arms of the government, originated in the years in which there was no market economy. They just don’t get it. Our biggest concerns regarding China are their banking sector losses and the currency. However, China’s top priorities are the loss of jobs from state-owned enterprises to the private sector as they privatize, and the income inequality between the rural and inland areas and the urban and coastal areas. We’re hoping that they revalue the currency. It’s not going to happen anytime soon. A good marker, I think, is the Olympics in 2008. China wants to be regarded as a full-fledged member of the global economic community, and they won’t be regarded that way unless they have gone a long way down the road toward freeing up their currency and making a number of reforms. It will happen, but not quickly."
"For now, nobody in their right mind should invest in the Shanghai stock exchange. There are no protections against insider trading, no transparency, and no certainty with the numbers. You can invest in H shares in Hong Kong. The listing requirements are much more stringent. In my opinion, the ADRs that are listed on the New York exchange are a reasonable way to invest. Here are a few:
"PetroChina (PTR NYSE) has a $64 billion market cap. It is the third largest equity in all of Asia. It’s a big, big oil and gas producer. And China needs a lot of energy to continue to run down its 8% growth path that they have been on. The legitimacy of their government rests on their ability to continue to deliver rapid growth in their economy and accordingly a rising standard of living for their people. Huaneng Power International (HNP NYSE) has a $9 billion market cap. There are big electric power needs in an economy that is growing very rapidly. China Mobile (CHL NYSE) is a $59 billion company. The p/e on a trailing 12-month basis is 13. The Chinese love their technology. They love the Internet. They love their cell phones. There is enormous growth potential in that area. China Petroleum & Chemical (SNP NYSE) has a $27 billion market cap. It’s a big, broad Chinese oil and petrochemical company. China Unicom (CHU NYSE) has a $12 market cap. It is another one of the telecom companies. Its stock price is way down. It’s up in the last year like everything else, but it's way down from where it was three or four years ago. China Telecom (CHA NYSE) is a $24 billion market cap. Again, it’s a big wire line telephone company, which serves about two-thirds of the most rapidly growing areas in China. These are all big companies sitting on the fastest-growing economy in the world. There is an enormous tailwind at their back. I think investors will be all right if they stick with listed NYSE companies. But it’s still a developing economy."
Today’s focus is in the US auctions, the FOMC later and the mood for risk. The GBP is an examp...
We hold three biotech stocks in our growth portfolio — Biogen (BIIB), Bioverativ (BIVV), and R...