Is the U.S. a Better Buy Than China?

The Motley Fool Global Gains team is headed to China in July for research. Ahead of that trip they're taking time to discuss some of the issues facing China and investors in China today.

According to a recent Bloomberg poll of professional investors and analysts, the U.S. has surpassed China as the most attractive place in the world to invest. Not coincidentally, Franklin Templeton's Mark Mobius recently observed that "Global investors are significantly underweight emerging markets."

Given market conditions, investors are obviously panicky, but is the slow-growing U.S. market really a better buy than fast-growing China?

Nate Parmelee: It looks to me like investors are once again forecasting next year's performance using last year's results. While the recent performance trend in the U.S. has been more impressive, with the S&P 500 down just 1% year-to-date while Shanghai composite is down 20%, that doesn't mean next year will follow the same trend.

We all know China's real estate bubble has the potential to cause a recession in China. But it's not like the U.S. is out of the woods. The ongoing need for stimulus and complete political distaste for it among a significant portion of the population makes me think the U.S. has a few more bumpy economic years ahead. 

The bright side to China's decline this year is that stocks there already have a 20% head start on a correction. What's more, China has the reserves to push into its banking system if it needs to, and the economic outlook for China and neighboring countries in Asia is brighter than it is in the U.S. over the next five years.

As a result, I don't expect U.S. companies such as AT&T (NYSE: T  ) to outperform their industry peers in China such as China Mobile (NYSE: CHL  ) , and I don't expect the U.S. investments to outperform those from China either.

Nate Weisshaar: Given the news coming out of Europe about governments not making good on their financial promises, I can't blame even professional investors for being a bit skittish. In times of uncertainty, markets tend to get short-sighted, so news that people are turning to the U.S. right now for financial comfort isn't all that surprising.

Despite what Glen Beck might have you believe, the U.S. is still the largest economy in the world and, while this might come as a shock if you're a regular watcher of cable news, boasts one of the most stable government and regulatory regimes around.

However, what's gone underreported in those poll results is that the majority of respondents are still looking for China to surpass the U.S. as the world's largest economy over the next 20 years. Since this is the consensus position and since we're long-term investors, the question really is: What can investors do today to prepare for that transition?

In reality, this is a lot like trying to pick the best U.S. car company to invest in back in 1915 -- there are lots of options, but little evidence about who the long-term winners will be. The safest play is to broadly diversify with exposure to large, state-owned companies such as CNOOC (NYSE: CEO  ) and China Mobile that have clear advantages of scale and access to capital today and a mix of small, entrepreneurial companies that can succeed in the shadow of the state-owned behemoths.

Now, some might take that comment to mean that I'm recommending the Xinhua China 25 Index (NYSE: FXI  ) . Nothing could be further from the truth. Although that ETF offers broad exposure to China, it's also heavily exposed to Chinese banks -- firms most likely to bear the brunt of any housing correction in China.

But if you are looking for a China fund, my choice is the Matthews China Fund because of its emphasis on the Chinese consumer (and away from banks) and a relatively low management fee for such a focused fund.

Rich Greifner: The key to answering this question depends on your time frame as an investor. For long-term-oriented investors with a time horizon of five years or longer, China is clearly a -- if not the -- market you want to be in. Over the coming decades, China's economy will grow at a pace that the U.S. cannot hope to match, which should translate into superior stock market returns.

However, if your time horizon is shorter than five years -- as it appears it was for the survey respondents -- then your investing goal should not be absolute gains, but capital preservation. And when it comes to safety and security, the U.S. market has China beat, hands-down.

Consider U.S. firms such as Coca-Cola (NYSE: KO  ) , and Johnson & Johnson (NYSE: JNJ  ) . Both look compellingly valued today and even offer sizable international presences and some China exposure (so if you buy them, you're not precluded from participating in China's growth).

Yet unlike many Chinese companies, they also boast decades-long track records, recurring revenue streams, strong balance sheets, steady dividend payments, and a history of transparency and shareholder-friendly behavior. In other words, you can own these stocks and still sleep at night -- something investors heavy into China might need some pills to do.

If you're a long-term investor with a tough-as-nails tolerance for volatility, choose China. But if you'll need to cash out your chips in the next five years, keep them invested in the good ol' USA.

Agree or disagree? Leave a comment below.

Want to find out what the team learns on the ground? Click here to sign up for regular dispatches from the road and get a free report full of stocks they uncovered on their last trip -- that are still attractive buys.

Neither Rich Greifner nor Nate Weisshaar own any of the companies mentioned here. Nate Parmalee owns shares of Coca-Cola. Coca-Cola is a Motley Fool Inside Value selection. CNOOC is a Global Gains pick. Johnson & Johnson and Coca-Cola are Income Investor picks. Motley Fool Options has recommended buying calls on Johnson & Johnson. The Fool owns shares of China Mobile and Coca-Cola. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 26, 2010, at 3:50 PM, jan1971 wrote:

    In general the value for money in many emerging markets is much better than in the USA, Europe or Japan. Because of this investors should always consider investing in emerging markets some way. Not only China is interesting, there are many other emerging markets that are interesting for investors. Investors should realize that prices and wages in some of those emerging markets are much lower than in adult economies like the USA. Besides this in most of them the population is on average much younger, rising costs of healthcare and social security are not a problem there. A friend of mine went to India almost every year. The rent for an apartment was 35 $ per month. He could eat and drink for just 1 to 2 dollars a day. In case infrastructure is being improved this also means manufacturing can be done much cheaper in such countries. In fact most American companies acknowledge this and expand there activities to such countries.

    Most large companies are active worldwide. this applies for American companies but also for many European and Japanese companies. Many of those European and Japanese companies that have significant activities or exports to emerging markets have much lower valuations than there US competitors. Some of them export a lot to those markets. Examples are the German car manifacturers BMW and Mercedes. Those stocks are easy to buy for American private investors too.

  • Report this Comment On February 09, 2011, at 10:52 AM, BeijingBob wrote:

    Is the US a Better Buy Than China?

    NO!

    Here's why: The article is correct to say that over the long haul (something our Western culture of instant returns and gratification simply can't grasp like those in the East) China, India and other 'emerging markets' will considerably outpace the US, particularily in consumer growth. And Why? Its simple, they have a whole lot more consumers than we do. China's "middle class" alone represents over twice the population of the entire US. I travel to China (on my own) - mainly to Beijing - at least twice a year to spec and buy products to ship to developing countries so I personally get in the mix with Chinese companies, people, culture (not just a guided tour of the Great Wall). The ecomomy is exploding there and the streets of Beijing are alive with brand new Beamers, Mercedes and other luxury cars. Clothing, electronics, food service, etc are also exploding. I of course wasn't alive then, but I can imagine what the post WWII economic boom in the US felt like as I walk the streets of Beijing.

    Also, Tim Hanson is correct in identifying the Matthews China Investor Fund. I have been investing in this fund (and its India counterpart) for a couple of years now and plan to retire on them 20 years from now when they have eclipsed most of the US driven funds of similar nature.

    Chinese stocks will probably remain volatile for the next year or two - but who cares if you are investing for the long-term (5 plus years). My novice advise: go Red, not Red White and Blue...

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