3 Bets on the Chinese Consumer

05/09/2012 11:30 am EST

Focus: GLOBAL

Jim Trippon

Editor-in-Chief, China Stock Digest

You can’t go wrong with a growth trend 1.3 billion people strong, says China expert Jim Trippon, who shares some of his favorite picks from the country’s consumer sector.

Jim, there is a lot of talk about China in the news over the past few months. Every time the banks raise the reserves over there, everybody panics. So what actually is going on there? Do you think we are going to go back to that super growth mode? I mean, they are still growing what, 8% or something?

They are still growing at 8%. In fact, if you look at what has happened over the last several years, it is truly amazing. I predicted ten years ago that China would surpass the United States in the next decade, and they are on track to do that in the next three years.

This year, 2012, is the first time in history that China’s economy has exceeded $10 trillion. They are at $11 trillion now. Here in the United States, we are only at $14 or $15 trillion.

Yeah, not so far apart.

Not so far apart, and what you are seeing right now is they are growing at almost a double-digit rate, while we have been having almost no growth at all.

Exactly. So there was a lot of talk several years ago with great stocks over there because there was so much infrastructure being built. Now did that come to a halt during this global recession, or are they still building cities overnight in China?

They are still building a lot of cities in China. What you have to understand about China is they are still 60% rural, only 40% urban. When they are fully developed, they are going to be 80% urban, 20% rural, so they have a lot more to go than they have already come as far as new buildings, infrastructure, freeways, ports, all of that is still being developed.

And most people hear China and they think technology companies. You think about Baidu (BIDU), which has been one of those. And some of the video gaming companies, which I think video gaming anywhere is not doing so well these days. But what other sectors in particular can investors buy into?

Well, in our China Stock Digest, what we have really been focusing on are plays that involve the Chinese consumer. See, we don’t know how Europe is going to do—if they are going to go back into a recession—so if you’re going to play China, you don’t want to necessarily depend on exports.

In fact, it was interesting two years ago. When the US economy had negative growth, China had almost double digit growth despite a 20% decrease in exports. What this means is that the Chinese consumer has more money in their pocket, and they are using it to upgrade their lifestyles.

So we are looking at things that are consumer plays, whether it be the utility companies, such as the telephone providers; whether it be the life insurance companies, things that are not related to exporting products to foreign companies, are the ones that are in the best position to do well this year in China.

So do you have any particular names that you like?

Oh, absolutely. One that I would look at is PetroChina (PTR); it trades on the New York Stock Exchange, and it is the Exxon (XOM) of China.

Another one that we might want to take a look at would be Baidu. Baidu took a tumble here about six months ago, and yet it started to build its base to recover. We put it back in our portfolio on January 1, and it is up 16% year to date.

Oh, that is tremendous.

And yet it still has a ways to go. What people don’t realize about Baidu is that they increased their market share 50% when Google (GOOG) exited China. So it has created a tremendous opportunity for Baidu.

Now, if an investor said, "Well, I don’t really want to invest in individual Chinese stocks because I just don’t know much about it…" Would you recommend an ETF or a mutual fund for them?

Well, most of the mutual funds that invest in China buy Chinese stocks traded on China exchanges. I don’t recommend that, simply because their accounting standards are not quite up to US levels quite yet.

So if you want to find a fun way to do it, one way to do it is to buy iShares MSCI Hong Kong Fund (EWH), which follows Hong Kong’s stock index. In Hong Kong, they use British-style accounting, which is more similar to ours.

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