Good/bad/indifferent time to buy in to China funds?
November 13, 2007 4:27 PM   Subscribe

Investment timing: what do you think of the timing at the moment for dropping money into China funds, or BRICs?

I'm very much on-board and up-to-date on the impending recession (or worse) in America, the ongoing housing collapse, the devaluation of the dollar, and growing credit woes, for what it's worth. I'm also aware of the need to carefully investigate the fee structure of any potential investment. I am fairly risk-adverse, but wanting to diversify and see if I can bring in a little higher average rate of return over the whole portfolio.

The wrinkle here is that the currency I'd be buying in to a fund or funds with would be Korean won. (Let's say, if it's germane, that I'm thinking on the order of the equivalent of tens of thousands of dollars, currently making about 6%, basically zero risk.)

The ones I'm looking at (although I am very much aware that 'past results are no guarantee of future performance') have averaged a 60%-100+% return in the past couple of years. Needless to say, that kind of thing is tempting indeed.

Any hard info, links, or just opinions would be most welcome, as I'm still far from fully-versed in this stuff.
posted by stavrosthewonderchicken to Work & Money (24 answers total) 4 users marked this as a favorite
China good. Not sure about BRICs in particular. I've been putting money into internation commercial real estate funds.
posted by jeffamaphone at 4:29 PM on November 13, 2007

I'm an ETF whore because I'm lazy, and VWO is doing quite well at the moment.
posted by Skorgu at 4:58 PM on November 13, 2007

Confucius say "When Chinese cab drivers and university professors are putting their savings in the stock markets, time for investors to take profit and sleep well."
I'm sympathetic to that point of view, bit it is only fair to point out that the major China ETFs like FXI are up 50% since the day that article was written. I'm glad I didn't sell out of China when the Roths wrote that. MarketWatch makes a good case that China is the place to be long-term. It is volatile as can be, but the returns have been awesome. I'd look to buy on the dips.
posted by Lame_username at 5:29 PM on November 13, 2007

What you are describing in the amounts you are describing is not something you should be timing, it's something you should be staging. The Goldman report talks about these economies developing into powerhouses in 50 years.

A few words of caution - Brazil, Russia, China and India are not known for their financial transparency, and that is the single most important thing that matters with foreign investments.

Also, why not just buy a BRIC fund from the source - Goldman Sachs BRIC A (GBRAX).

But here's the point I want to make. Look at the holdings of this BRIC fund managed by the firm who coined the term 'BRIC'. Three oil companies, one natural gas company, and one mining company. One cell phone company, and a couple of banks.

Guess what, investing in these countries is functionally equivalent to investing in natural resources and industrial commodities.

Think about it logically for a second. 3 billion+ Russians, Brazilians, Chinese, and Indians are going to want to live at worst a lifestyle equivalent to that of West Virginia or Portugal.

Think of all the electrical cable that needs to be run. Think of all those cell phone towers, all those silicon and metal based microprocessors. Think of all those steel refrigerators and appliances. Think of all the cars. Think of all the concrete, cement, and wood they'll use. Think about all the plastic they'll use.

Think of all the water they'll need, and pipes for it to run through. Think of all the cotton they'll wear and the wheat, rice, and corn they or their livestock will eat.

Think of all the oil.

You live in Seoul, right? Imagine trying to build 35 Seouls in 25 years. Globalization means I don't need a Chinese stock to invest in china. I just need to know that they have 127 cities with over a million people in them who need copper wire and copper pipes to know that I need a copper company. For an American, that means FCX and PCU.

The Korean won is at an historic high against the dollar, and mining and oil companies here have been hammered recently. You are getting a huge discount now, but the dollar won't be cheap forever. You can buy GBRAX, or you can cherrypick the best of the oil copper, iron, cement, infrastructure, agriculture stocks yourself. Or keep put 90% into the fund and leave 10% for your own investing as a way to become more educated (you never learn faster than when you have money at stake).

Another example? I stand by this comment I made earlier. John Deere is an agriculture company, and everyone thinks about the wholesome American farmer when they think John Deere, but really it's a Brazil and China play. Deere reports Nov. 21, and the conference call will be an global economics lesson in microcosm. We are going to learn to what extent these BRIC economies are strong in the face of a weak dollar, and the extent to which US manufacturing is linked to those economies.
posted by Pastabagel at 5:36 PM on November 13, 2007 [5 favorites]

Chinese stocks are impossibly overvalued. There has to be a market correction in the future.

If you want to take the China gamble, I would work on a foreign company doing business in China that also does significant business in other countries. Perferably a company that does infrastructure development (power plants, cable, etc).

Of course, I've been saying the same thing about GOOG for awhile now.
posted by Pants! at 6:36 PM on November 13, 2007

I agree with everything Pastabagel says (both in this thread and in the linked thread) but, for me, it leads to the opposite conclusion. That is, in the face of the staggering amount of data and possible correlations, one should opt out of the top-down investment strategy rather than dive in. As Pastabagel said in his linked comment, "The interrelationships are staggering, and you need a fleet of analysts to maintain just superficial grasp of them all."

This is what leads some investors to a value-oriented, bottoms-up strategy. Seth Klarman says it well:
…A top-down investor must be correct on the big picture (e.g., are we entering an unprecedented era of world peace and stability?), correct in drawing conclusions from that (e.g., is German reunification bullish or bearish for German interest rates and the value of the deutsche mark), correct in applying those conclusions to attractive areas of investment (e.g., buy German bonds, buy the stocks of US companies with multinational presence), correct in the specific securities purchased (e.g., buy the ten-year German government bond, buy Coca-Cola), and, finally be early in buying these securities.

The top-down investor thus faces the daunting task of predicting the unpredictable more accurately and faster than thousands of other bright people, all of them trying to do the same thing. It is not clear whether top-down investing is a greater-fool game, in which you win only when someone else overpays, or a greater-genius game, winnable at best only by those few who regularly possess superior insight. In either case, it is not an attractive game for risk-averse investors.
Klarman, instead, advocates the bottoms-up approach:
By contrast, value investing employs a bottom-up strategy by which individual investment opportunities are identified one at a time through fundamental analysis. Value investors search for bargains security by security, analyzing each situation on its own merits. An investor’s top-down views are considered only insofar as they affect the valuation of securities.
Now, while I'm partial to this style of investment philosophy, I really have no basis to recommended it for any given individual. But I want to put it out there as an example of an alternative approach to investing--one that may appeal to a certain kind of risk averse investor who is worried that the only route is to somehow understand and predict the inherently difficult and chaotic macroeconomic condition.
posted by mullacc at 6:50 PM on November 13, 2007

One line response: buy in China before the Beijing Olympics.
posted by electric_counterpoint at 8:23 PM on November 13, 2007

China's P/E ratio is outrageously high. If you buy in now, you're buying at the top. The smart money would buy something distressed and cheap. The cheap dollar has made a lot of US assets look much more attractive.
posted by evariste at 10:35 PM on November 13, 2007

I had 40% of my retirement portfolio in China over the last two years, and I dumped all the China stock six weeks ago. Took a tidy profit, too. Just one guy's opinion, though.
posted by ikkyu2 at 10:55 PM on November 13, 2007

You say you are fairly risk-adverse, yet you are trying to time the market. You say you want to diversify yet you are trying to over-weight a narrow sector. Both of these contradict your stated goals. Trying to juice up your returns is the classic road to failure. If you are looking for excitement, go to Las Vegas.

You are better off buying a broadly diversified (Europe, Australasia, Far East) international index fund. Or if you want to control your allocations individually, separately buy a European index, a Pacific index and an emerging markets index.
posted by JackFlash at 12:16 AM on November 14, 2007

Response by poster: You say you are fairly risk-adverse, yet you are trying to time the market.

Nope, I'm in for the long haul, if I'm in. I'm not trying to time the market, I was just hoping to get some thoughts from our resident econ types on how they think the coming shitstorm in America will impact China (which I didn't make clear in my question, unfortunately, and as a result, hasn't been addressed all that much).

You say you want to diversify yet you are trying to over-weight a narrow sector.

I'm diversifying from a position of 100% cash, at a comfortable but unexciting rate of return, and a good-sized stake in the company I work at, which I also plan to hold long-term. These things are relative -- anything would be diversification for me, and I was only thinking to throw a small piece of the pie in that direction.

Anyway, thanks for the advice, all who offered it so far. I don't tend to mark Best Answers, because if I knew what the best answer was, I wouldn't have asked. Nonetheless, thanks.

Except JackFlash, who can piss off with the condescencion.
posted by stavrosthewonderchicken at 6:27 AM on November 14, 2007

Your question stated your goals as "I am fairly risk-adverse, but wanting to diversify." Your proposed investment will do neither.

If you are asking if this is a good time to invest in China because of what might happen in America, you are by definition timing the market. It doesn't matter whether you are in it for the long haul. Market timing is not a risk-adverse strategy.

If you are making your only non-cash investment in a single emerging market country, you are by definition not diversifying. You are betting on a single high-risk roll of the dice.

There's nothing wrong with this if that is what you really want to do. It's just that it won't accomplish the goals you stated in your question. I apologize for my misunderstanding.
posted by JackFlash at 9:31 AM on November 14, 2007

All of you who are saying that China is overpriced aren't understanding the question. Goldman's original paper describing BRIC's and the opportunities there presented them in the context of DECADES of growth.

A high P/E can be reversed in a three day correction on the P side or longer by raising E. The whole point is that E, the earnings from China are going to grow.

Furthermore, P/E is a nonsense measurement. Growth investors use P/E/G (and the whole point is that China is a growth story), and typically buy at PEG=1 and sell at PEG=2 (roughly).

Using this measurement, crazy high-flying go-go stock China Mobile (CHL), with its crazy P/E of 36, has a P/E/G of 1.17, which is not only lower than something like Google, it's lower than Coke and McDonald's. Without doing any more research (which I will) CHL is not expensive, it's cheap.

I've read Klarman's book, and in the passage quoted upthread, he's less than forthright about the "art" of value investing than he is elsewhere in that book. He makes it clear that judgment calls have to be made in choosing discount rates and which particular value metrics you use when evaluating something as a value stock. Both top down and bottom up investing require judgment calls and educated guesses.

His statement about a top-down investor needing to be correct on the big picture is silly, of course he does.

But it is actually quite easy to be right about the big picture issues, more so than some judgment about the right discount rate to use in an NPV calculation. Will China and India develop economically in the next 50 years? Is this really a difficult question? A 3000 year trend in both places says it is likely.

Despite all it's growth, only about 300-400 million Chinese are currently participating in the "new" China. That means 3 US-populations worth of Chinese people have yet to come online. Assume only that they want running water and nothing else, and you get a massive surge in copper demand. Assume that every household in China uses only one light bulb a year. Assume one cell phone per neighborhood. Assume one car per hundred people. Make a completely baseless and unreasonable low ball estimate of the bare minimum growth and the results are still staggering. The scale here is unprecedented.

To say that top-down is risky is to say that history, economics, philosophy and political science are merely nostalgia, and should be set aside for a handful of NPV calculations.

The purpose of becoming educated is to understand how the world works. China and India must develop economically for the same reason that an apple must fall to the ground when you release it from a height. It is how the world works. Humans evolve and evolve and develop. At one point, flint gave way to bronze, which gave way to iron.
posted by Pastabagel at 9:38 AM on November 14, 2007

To say that top-down is risky is to say that history, economics, philosophy and political science are merely nostalgia, and should be set aside for a handful of NPV calculation

I wouldn't say that, and I don't think Klarman would either. My feeling on the matter is that if you have a thorough understanding of history, economics and such things, you should know that predictions about the future have a poor record of accuracy and even backward-looking analysis suffers from narrative fallacies. Further, even if you could accurately predict macro-economic conditions in a broad sense, it does not follow that specific investments will perform as expected. Your thesis (and Goldman's) on China makes a strong case, in my opinion, for allocating a portion of one's portfolio to something like an index fund that captures broad swaths of China's general economy. But I don't think it provides the right approach for buying individual securities. And even the "buy the market" indexing strategy represents non-trivial risk, especially at relatively high prices (disclosure: I don't mean too risky, since I have a portion of my own retirement portfolio in such assets).

He makes it clear that judgment calls have to be made in choosing discount rates and which particular value metrics you use when evaluating something as a value stock. Both top down and bottom up investing require judgment calls and educated guesses.

To say that value-investing boils down to picking a discount rate and a few value metrics does a severe disservice to the disclipline. And I'm not sure where you got the idea that value-investors want to rely on a "handful of NPV calculations"--my experience tells me that bottoms-up value-investors view this approach more suspiciously than just about anyone else. It's still done, of course, as it's part of any investors set of fundamental tools. But it's hardly relied on and no single assumption or set of assumptions is ever settled on. Rather, the bottoms-up investor looks for situations where the she can eliminate the number of judgment calls she needs to make and has more concrete, firm-specific data to work with (e.g., a company is valued at less than liquidation value and the investor has confidence in the value of assets on the book; or, a company's bonds are trading at 40% of par as the company heads toward BK but it's likely that operations can continue unabated once the balance sheet is cleaned up). Top-down investing, on the other hand, seems to involve continually layering on more and more judgment calls.

China and India must develop economically for the same reason that an apple must fall to the ground when you release it from a height. It is how the world works. Humans evolve and evolve and develop. At one point, flint gave way to bronze, which gave way to iron.

Sure, but this doesn't mean the copper futures speculator must make money.

But snark aside, I find your line of thought interesting and compelling. If you're managing money professionally using such a strategy, I imagine you're doing very well and deservedly so. But I know I couldn't do it that way and I don't think it's because I'm uneducated or an idiot. And I'm doing this for a living. I can't imagine the amateur investor doing this without taking on more risk than he or she realizes.

stavros: My apologies for derailing your thread. I think what I've said is important to consider when devising an investment plan, but it won't help you on specific actions to take, I realize. I've seen many positive things in the course of analyzing opportunities in China and India, but I've also seen horribly, horribly mismanaged companies--it makes me shudder to contemplate investing in some of these companies. And those are the companies that have some level of transparency into operations and financials (and usually that only came through direct involvement with management). But that's just my experience and I can't say it's a universal truth. Like I said, I have a portion of own portfolio invested in low-cost emerging market index funds. But I consider it a "risky" portion of my overall allocation.
posted by mullacc at 11:48 AM on November 14, 2007

I have to agree with mullacc. It is a common fallacy to assume that a high rate of growth equals a high rate of return. In fact the opposite is often the case. Value stocks frequently outperform growth stocks. High growth rates are anticipated by the market and reflected in their high stock prices. High prices result in lower returns. A truer guideline is that higher risk accompanies a higher "expected" return. Emerging markets have high risk which may lower relative prices, leading to higher returns, but it is not simply because of growth. Higher expected returns are no free lunch. They are accompanied by higher risk, meaning that the standard deviation of possible returns is large. You can go bust as easily as getting rich.
posted by JackFlash at 12:25 PM on November 14, 2007

Pastabagel: be careful of CHL. Indeed, of the 4 publically traded Chinese telecom ADRs (CHA, CHU and CN are the other 3), it has been the most successful and high-flying.

When I bought CHA in October 2005, I was pleased to learn that the Chinese government was already overdue in terms of deciding to whom to award China's first 3G licenses. I thought, well, these'll be awarded soon and that'll be that.

It's November 2007 and the licenses still haven't been awarded. Rumors are all over the place. CHL has done too well and they're going to award the bulk of the 3G licenses to CN and CHU which are struggling. CHL and CHA are going to be merged and the resulting company will get the 3G licenses as well as maintain all of CHA's current geographically demarcated hard-lines. (The rumors don't include what the capital structure of the new entity is going to be with respect to its shareholders, of course.) Or, CHL is doing so well with the 8 pilot 3G sites that they're going to be awarded all the 3G license and the other operators expected to just perk along with their wirelines and outdated 2.5G services until they fold up shop.

No one knows how this is going to play out and markets hate uncertainty. (Not speaking Mandarin myself, I can't even access the majority of the rumors!) If you do want to research Chinese telecom I do encourage that you be aware of these issues.

I went back up top to quote the person who complained about financial transparency, but I see it was you. So I won't quote you back to yourself. :)
posted by ikkyu2 at 4:09 PM on November 14, 2007

mullacc I didn't mean to suggest that value investing is a bad approach, just that it has its share of judgments and best guesses that have to be made as do other approaches.

Also, I didn't mean to suggest that anyone buy CHL by any stretch of the imagination. I happened to pick that because it was one of the top holdings in some China fund.

To get back on the track of the original question, my point was only to make it clear that many BRIC funds are in fact investing in precisely the same kinds of companies that you'd buy separately if you thought about the implications of China growth.

For what it is worth, I often wonder if the value investor, the growth investor, and the technical trader would all using their own methods pounce on many of the same stocks at the same time. E.g. Value investor sees an opportunity to buy X in the midst of an irrational market panic when the underlying business is unaffected but the stock price gets clipped 10% at precisely the moment that the 10% drop lands the stock squarely on, say, the 200-day MA, which is also when the growth/momentum trader realizes that all these other guys are going to be piling into this stock, etc. For some of these stocks to make big moves and have prolonged runs, I wonder if it means that all investment approaches are converging.
posted by Pastabagel at 4:38 PM on November 14, 2007

Response by poster: If you are asking if this is a good time to invest in China because of what might happen in America, you are by definition timing the market.

Nonsense. I am thinking of throwing some money at China. I was wondering if anyone had any advice or information that might make me think twice about doing it now or soon, given the clearly worrisome situation in America. That's not 'timing the market', that's being reasonably prudent. I honestly didn't know how the coming depression in America (or something less dire but still catastrophic) would have an impact on China funds or BRICs.

If you are making your only non-cash investment in a single emerging market country, you are by definition not diversifying.

Perhaps this is not clear to you, because I wasn't explicit. I live in Korea. My cash is in Korean won. I have no investments, earnings, savings or property of any kind outside of Korea, nor do I plan to acquire any in the forseeable future. By definition, investing outside of Korean currency in the bank and the single (Korean) company in which I hold significant stock is diversifying from my current position. You'll also note that I asked about BRICs, which are not, as you suggest, 'a single emerging market country'.

Your question stated your goals as "I am fairly risk-adverse, but wanting to diversify."

I am and have been risk-adverse, but clearly by merely asking the question, I am telegraphing the fact that I'm willing to take on some risk, if the potential rewards are sufficiently enticing, with some smallish percentage of my investable cash. The question was intended to help me assess, along with other research, the magnitude of that risk.

stavros: My apologies for derailing your thread.

Not at all. More information is always good.
posted by stavrosthewonderchicken at 11:14 PM on November 14, 2007

Response by poster: (But I probably shouldn't have used the word 'timing' twice in my question. Sorry about that.)
posted by stavrosthewonderchicken at 11:15 PM on November 14, 2007

China's pollution problem needs to be dealt with if it going to develop to its full potential.
posted by jasondigitized at 9:52 AM on November 15, 2007

Response by poster: For future reference of anybody looking at this thread, here's an excellent contemporaneous roundup from The Economist, which answers most of the questions I had in mind when posting. A money quote (literally):
China A shares have been the frothiest this year, up by 104%. Thanks to frenzied buying at its stockmarket debut, PetroChina is now by some measures the world's most valuable company—three of the world's five largest companies are Chinese. A forward p/e ratio for A shares of 40 (again, based on forecast profits) certainly looks bubbly, but it too is much lower than in previous bubbles. The p/e reached 80 in Japan in the late 1980s, while on America's NASDAQ it hit 90 in 2000.

The p/e for Chinese shares that foreigners can buy is a more modest 22, well below the 40 reached in 2000. In contrast, Indian shares, also with a p/e of 22, have never been so overvalued. And while p/e ratios of 11-12 in Russia and Brazil seem like a screaming buy, relative to their historical averages of 7-8 they look generous.
posted by stavrosthewonderchicken at 12:49 AM on November 20, 2007

Response by poster: Also, this, from the Financial Times.
China’s commerce ministry warned on Thursday that a slowing US economy would trigger a drop in Chinese exports that would mark a “turning point” for China’s rapid economic growth.

A global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year”, a report from the ministry’s policy research department said.
posted by stavrosthewonderchicken at 1:03 AM on November 20, 2007

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