Tags: shidlo | china | risk | investing

Investing in China Without the Risk

Tuesday, 06 Sep 2011 08:39 AM

The recent halt in trading of the shares of Sino Forest, the Toronto listed Chinese forestry company that is fighting allegations of fraud, has scared many investors in the world’s second largest economy.

In addition to this negative event, investors have also been spooked by the U.S. Security and Exchange Commission’s (SEC) announcement earlier this year that investors should be cautious in investing in Chinese reverse-merger stocks.

Chinese companies that are listed in the United States but have most of their operations in China and opted to use the relatively easy and cheaper way of reverse mergers are tracked in an index called CHINARTO.

The Bloomberg Chinese Reverse Mergers Index has fallen 48 percent since the end of December 2010 which is more than the S&P 500 although it is obvious that not all the listed companies have been charged with fraud.

Still investors who wish to invest in China and are afraid of not being able to identify the few rotten apples in the barrel can opt to invest in an actively managed China fund that has experienced managers rather than a passive China index fund.

Another option is to invest in multinationals that have a relatively large exposure to China. One sector which is growing rapidly in China is luxury goods. Whereas Japan used to be the number two market for luxury goods after the United States, the aftershocks of the recent earthquake has catapulted China into this position from number three.

Even with the slowdown globally, Chinese continue to buy luxury brands from cars to handbags and jewels. Last week, Tiffany’s — the world’s second largest luxury jewelry retailer — presented outstanding results beating analysts’ expectations by a wide margin. Tiffany’s expects annual global sales to increase at a high teens percentage with Asia being the powerhouse.

It is a shame that the only ETF (ROB) focusing on luxury goods closed down not because of performance (it actually outperformed other retail sector indexes) but rather due to low fees to its parent company Claymore. It is rather difficult for the individual investor to replicate the 32 companies held by ROB.

Still there are a few companies that one can look into that are listed in the United States as well as in Europe and would be the top holdings of such luxury funds. Richemont, a Swiss company, might not be a household name but its jewelry and watches brands are well known – Cartier, Van Cleef and Arpels, Piaget, Jaeger le Coultre, IWC as well as Montblanc writing instruments and Alfred Dunhill leather goods.

Another familiar name to fashionistas is LVMH, one of France’s largest companies that sells not only Louis Vuitton leather goods but also Moet & Chandon Champagne, high fashion, watches, jewelry, perfume and cosmetics. In 2010, LVMH sales from Asia ex Japan were an impressive 25 percent with the U.S. contributing 23 percent of sales and Europe 21 percent. It seems Japan is now lagging with 9 percent of sales.

Tiffany’s is listed in the NYSE whereas Richmond and LVMH, companies with capitalization in the tens of billions of dollars are amazingly listed in the pink sheets for the time being as well as on the Paris and Zurich stock exchanges.

Luxury brands will continue to benefit from the rising demand of consumers in emerging markets (not only China) and already represent around 40 percent of global sales in this sector.

During the recession, luxury brand companies had the opportunity not only to cut costs but also expand capital investments. It is time for another fund manager to restart luxury goods ETF as this sector tends to outperform other retail indexes even in times of global recession. In Europe though there are several luxury goods funds.

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GilShidlo
The recent halt in trading of the shares of Sino Forest, the Toronto listed Chinese forestry company that is fighting allegations of fraud, has scared many investors in the world s second largest economy. In addition to this negative event, investors have also been...
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