Hundreds of hotshot money managers and analysts convened at the Marriott Marquis in New York last fall to attend JPMorgan Chase's annual Asia Pacific and Emerging Markets Equity Conference even as those emerging markets were seemingly falling apart. I guarantee you that they weren't there because they're scared of investing in emerging-markets stocks.
But many were, and I can't necessarily blame them. It turns out, however, that if you could stomach emerging-markets volatility, you would have been richly rewarded.
Some very scary numbers
See, markets such as China, India, Indonesia, and Brazil were all absolutely crushed in 2008. China was underwater to the tune of 60%, Indonesia and India 50%, and Brazil 40%.
It was a tough and volatile period for emerging-markets investors, and those who naively came to believe (thanks to the 2003-2007 period) that emerging-markets investing was all about outsized gains went away with their tails between their legs.
But it turned out that last year was precisely the wrong time to abandon emerging markets. Chinese, Indonesian, Indian, and Brazilian stocks all returned more than 60% last year! So did you miss your chance to make money in emerging markets?
Not if you believe Burton Malkiel
The good news is that even if you weren't invested in emerging markets last year, the forces that drove those stocks upward should prove to be sustainable. In fact, it was at that same JPMorgan Conference that famed author, investor, and Princeton economist Burton Malkiel presented his "Investment Strategies for the China Century" -- and as the title implies, these are not things that are going away. Here's the summary:
- Though China's GDP growth is slowing, it will remain the fastest in the world.
- If you're an American investor, you're lucky to have even 2% exposure to China -- and that makes you dangerously underexposed.
- The recent decline in China stock valuations, together with the magnitude and duration of China's potential growth, makes today an "unprecedented investment opportunity."
Those are his words, not mine, although I do agree. The question, of course, is how does the individual American investor take advantage of this unprecedented opportunity?
Your four options
If you're an American investor looking for maximum returns and minimal hassle, then you have four ways to buy China:
- Buy a Chinese index fund, such as the Xinhua China 25.
- Buy an actively managed mutual fund -- such as Matthews China -- that is concentrated in China.
- Buy multinational corporations such as 3M
(NYSE: MMM), Deere (NYSE: DE), and Nike (NYSE: NKE)that have made doing business in China a significant part of their growth strategy.
- Buy individual Chinese stocks such as New Oriental Education
(NYSE: EDU)and Mindray Medical (NYSE: MR)that trade on U.S. exchanges.
Each of these approaches comes with its own set of pluses and minuses. Though the index fund is low-cost, for example, it will condemn your portfolio to holding nothing but enormous, bureaucratic, state-owned enterprises such as Chinalco
Can you pick your own stocks?
That leaves two options: picking your own multinationals, or picking your own Chinese stocks. In fact, Malkiel recommends that you do both.
Of course, you'll probably feel more comfortable researching U.S. stocks that have a CEO who speaks your language (literally), that sell products familiar to you, and that releases financials you're more likely to trust.
Malkiel argues that when picking Chinese stocks, you should avoid the big, state-owned enterprises. Instead, focus on small caps that are run by passionate entrepreneurs, rather than the cautious (and Communist) Chinese government. These stocks have more potential and more upside, and they're more likely to have been overlooked by institutional money thus far -- so you might get a screaming bargain.
To do so, however, you need to know a thing or two about China. At Motley Fool Global Gains, we'd like to help you with that.
If you pursue both of these strategies, you mitigate some of the volatility and maintain China's upside -- a recipe for making good money in the long term. If you focus solely on Chinese small caps, then you get a whole heck of a lot of upside, but you will need to be able to withstand serious volatility.
If you stick solely with multinationals, however, then you're back at square one -- lacking direct exposure to China.
Global Gains can help you get out of your comfort zone. We've traveled to China three times since 2007 and established a network of contacts, and we specialize in finding and vetting promising Chinese small caps that we believe have the potential to be multibaggers many times over for many years to come.
If you'd like to look at all of our China research and insights, as well as read about the stocks we're recommending today, click here to join Global Gains free for 30 days. There is no obligation to subscribe.
This article was first published Sept. 12, 2008. It has been updated.
Tim Hanson does not own shares of any company mentioned. 3M is a Motley Fool Inside Value selection. Mindray Medical International is a Motley Fool Rule Breakers pick. The Fool owns shares of Best Buy, and its disclosure policy owns other disclosure policies on the basketball court.