Ted Parrish said something in the Bull/Bear debate that a lot of people think but get wrong. I have written about this before. Buying a multi national company does not allow you to capture the effect of a foreign country.
He made the point in response to a question about China and mentioned Caterpillar (CAT) by name as an example. BTW CAT is a core holding for most clients and has been for a couple of years. One of the reasons I bought the stock is they sell a lot of tractors to China. But you are not capturing China. In fact if you click here you will see that over the last two years the correlation between Shanghai and CAT looks perfectly negative. In that time CAT is up 70% and Shanghai is down 30%. Hey this was Ted's example not mine.
For my example I would take Australia. I write about the country all the time. They are selling all sorts of stuff to China. The correlation between Oz and Shanghai looks negative too. In the last two years; Oz up 40% Shanghai down about 30%.
Too many people listen to this nonsense and believe it. Don't be one of them.
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2 comments:
Roger,
I agree with you that you do not capture the market itself by owning CAT (I also own it), but if you want to profit from the economic growth in China it is very difficult to find good China stocks. Often times the better (only) way is to own stocks in any other international market that benefits from the growth in China.
I worked in HK for almost 20 years and still have many friends doing a lot of dollar volume in many different types of businesses in China, and to a person they all complain about how hard it is to make a profit there. To quote one, “I turn over one hell of a lot of dollars but don’t end up with many left over at the end of the year.” To quote another, “The Chinese are genetic capitalists, and if you have any pricing power it disappears quickly.”
I subscribe to your newsletter (excellent) and know you like Sinopec. I like Huaneng Power (HNP) if the government would let it price it power at market rates, like it makes it pay for its coal, but it won’t for political reasons. I keep looking for that good China play that balances risk and reward, but no luck yet.
Regards, Jim in LV
Jim, thanks.
To be clear I am all on board with an investment theme of selling to china. Owning multi nationals that sell all over the world can often be good investment too, to be sure.
I just don't think, as Jim adds,that these types of stocks are good proxies for where they sell to.
The Shanghai market has done very badly so it is not a shock the stocks have also done poorly but they do capture what is going on, a down market. for what its worth, clients own only one chinese stock which is hardly a big bet.
thanks again.
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