"China made me rich last year."
Maybe that's a strange thing for an American of any stripes to say, but it was a comment I heard from a money manager early in 2010.
See, while U.S. stocks had a decent 2009 (up 20%), Chinese stocks had a banner 2009 (up more than 70%). And while China is not replicating that success thus far in 2010, that just means now is the time to make sure your portfolio has at least some exposure to this long-term economic success story.
And by "now," I mean "right now."
Chinese stocks have dropped nearly 20% in 2010 due to a generally panicky investor environment. Ask yourself: Has one-fifth of China's economic promise evaporated in less than six months?
Not even close
Yes, some of this is a natural correction and investors are right to be wary of China's housing bubble, but the Middle Kingdom also has a lot economically going for it. According to the OECD, China's economy will grow more than 11% in 2010 and just less than 10% in 2011 -- making it the fastest-growing market in the world. Further, the country's recent announcement that it will unpeg its currency may suggest that the country's internal consumption is about to take off.
And while a rising tide will lift a lot of boats, the stocks that will rise the most are those that you can buy cheap and that will benefit most from the country's economic priorities.
Those priorities, specifically
Thanks to its five-year plans, the Chinese government makes it easy for outside investors to know where the country is headed. Two main themes that investors can easily capitalize on are building infrastructure and increasing domestic food production.
Caterpillar (NYSE: CAT) is one of those names that is set to profit from China's rapid growth. It recently opened a new plant in Wuxi and has 11 facilities in the country. Similarly, Ingersoll-Rand (NYSE: IR), sensing the opportunity in infrastructure, has spent the last couple of years buying up a number of Chinese toolmakers.
When it comes to agriculture, there's no disputing that China has more than 1.3 billion mouths to feed. And while China's farm production is on the rise, arable acreage continues to decline -- meaning Chinese farmers need to get more bang for their buck.
That's been a boon to fertilizer- and seed-market Monsanto (NYSE: MON), which has more than doubled its sales to Asia since 2003, as well as for Deere (NYSE: DE), which just finished an acquisition of a Chinese tractor manufacturer and is expanding its China product line.
For these four large companies looking for growth, it's been obvious through their actions where they think they can find it.
Cash in on China
None of these companies, however, is a pure-play on the Chinese economy, and you'll need to find one of those if you want to make serious money in the country. After all, the stocks that drove the Chinese market up 70% last year are not multibillion-dollar multinationals.
You need to be careful, though, when you start sifting through Chinese stocks. While the upside potential is huge, small Chinese companies can also have issues when it comes to corporate governance and internal controls. To account for that, look for:
1. Experienced and aligned management
2. Proven cash-generating business plans
3. Friendly relationships with the government
4. Scalable business models
5. Stocks that are also owned by reputable American institutional investorsHo
And above all, demand a hefty margin of safety when you buy. If you can all of these things, I believe investing in China can make you rich.
Let's get rich
This is how we approach investing in China at Motley Fool Global Gains, and our research team is heading back to the country in July in search of promising investment opportunities amid the current market carnage. If you'd like to hear about what we find, simply provide your email address in the box below to get our updates from the field. You'll also get a free report with five Chinese buys we like today.
