Investments That Have Nothing to Do with China

CNBC was thinking along the same lines when they suggest that you should own stocks that have nothing to do with China. Three suggestions that they offer include Sherwin-Williams, Waste Connections, and Zoetis.

These picks make up an odd trio of companies in waste management, home construction, and animal health, but the strategy connecting them is: “You can own all sorts of names that are not related to the China deal that are still growing earnings 10 percent.”

The common factor with these investment options is that they all do business within the USA, are not dependent on materials or products imported from China or sales in foreign markets.

And, these stocks have other attractive features. For example, Sherwin-Williams barely noticed when the financial crisis occurred and the market crashed. And, its stock price has gone up from the $50 range to the $550 range since that time! Waste Connections is another stock that barely flinched during the 2008 market crash and has gone up from being a $13 stock in those days to a $90 stock today. Zoetis has only been listed for six years but has gone up from $33 a share to $120 a share during that time. And, it does not jump up and down with every innuendo in the trade war.

Investments That Will Detach Themselves from China

In our article about investing during a protracted trade war we noted that that the ABC (anywhere but China) movement is taking hold. As this advances, we will see more and more companies that are not dependent on China for their supply chains including raw materials and for their markets. This will add to your list of investments that have nothing to do with China but do have access to international markets.

Investments in China

For the average investor, the best ways to invest in China are through a mutual fund or other stock fund that holds Chinese assets or by purchasing ADRs. You don’t need to speak Mandarin or deal with a foreign stock market and can let someone with the time and expertise pick the individual stocks. But, if you want to pick and choose the right individual stocks, you can buy ADRs of large Chinese companies who provide financial reports on a par with what US companies provide when they are listed on the US stock exchanges. In regard to our concern about safe investments in China, here is where our focus is. Investor Place looks at 3 Chinese stocks which they say you should buy and hold. Their article not only offers three stocks that may be safe investments with high returns over the years and therefore safe investments for retirement. They also give us some insight into the current state of the Chinese economy what the future holds for investing in China.

To say that Chinese stocks have been a roller coaster over the last year would be an understatement. Already, China has seen slower growth as it shifted from being a solely manufacturing-based economy to one based on services/consumerism. But with the trade war, Chinese stocks have been hit even harder, only to bounce back as a deal with the United States seemed to be within grasp.

Then, President Trump tweeted. With no deal in sight, tariffs rising and even lower growth on the horizon, Chinese stocks have continued to sink over the last week or so.

But this could be an interesting opportunity for long-term investors. China continues to dominate on the world stage and is arguably one of the most important economies. And while a deal may not be in sight today, there’s a good chance that one will be ironed out eventually. Meanwhile, with its huge and growing consumer base, domestic growth continues despite various trade pressures. In the end, Chinese stocks could be a wonderful long-term play. And the recent hiccups have provided a “reset” in valuations ripe for the picking.

At this point, we are looking for safe investments in China and investments with high return. As China’s foreign sales level off or are rolled back due to trade war and cybersecurity issues, they have a huge internal market to develop and that may well be where to invest in China. And, in that regard, the first Investor Place choice fits right in.

Investing in Alibaba

Alibaba is generally thought of as the Chinese Amazon.com. They serve as a marketplace for selling products online but do not hold any inventory. As such, they may be more similar to eBay. Either way, Alibaba is a huge and growing company in the huge and expanding Chinese market. And, like Google, Alibaba is not resting on its laurels but reinvesting its profits in a variety of other businesses such as social media, cloud computing, mobile devices, and peer-to-peer lending.

In our article, Is There a Safe Fifty-year Investment, we noted that companies like AT&T, General Motors, Coca Cola, Kodak, and others were uniquely positioned to provide products and services to the growing US economy over much of the twentieth century. Their level of success and even dominance did not last forever, but it lasted for a long, long time. This is a good way to look at Alibaba. They are positioned very well in a very large and growing market. Their wide range of virtually recession-resistant products and services protects them again be totally devastated by a prolonged or permanent trade war.

Are there safe investments in China today? Yes, and Alibaba seems to be one.

Investing in Baidu

Baidu is often referred to as the Chinese Google. They control 80% of internet searches in China. Like Google, they make billions of dollars a year on selling ads. And, like Alphabet, Google’s parent company, Baidu has diversified into other tech areas such as autonomous vehicles, artificial intelligence, and video with its iQiyi subsidiary. Baidu’s growth is based on still-expanding use of the internet in China and not on exports to saturated and increasingly trade-protected North American and European markets.

Are there safe investments in China? Baidu is one and will likely be for a long time.

Investing in Ctrip.com

This is not a big company but rather a normal company that is well-positioned in a growing niche market. They run accommodation and travel booking sites. Airlines, hotels, cruises, and others use Ctrip.com to list their unsold services. This is an extremely low-overhead business in a growing market. As China shifts to a consumer-driven economy and focuses more on internal growth, this company has the potential to keep expanding the Chinese travel more and more. The risk of investing long term in these folks, like the rest, is that this is a business that competitors can mimic and take market share.

Safe Investments for Beginners in Chinese Stocks

Beginners at investing should typically stick with investments that they know and investment vehicles that protect them against undue risk. In regard to risks of investing in China, ADR’s of companies doing business solely in China, like Alibaba, Baidu, and Ctrip.com are a good idea. At this point, we prefer the few stocks mentioned because of their Chinese consumer focus. Our concern about Chinese tech companies and exporters is that the trade war with the US is not going to end soon and may spread to involve other nations. China has grown fast and is getting to a point where it wants to display regional and global dominance. This will meet resistance across the globe and make much of China’s export-driven growth slow even more.

Chinese Debt and Investment Safety in China

Much has been made of China’s increasing debt at a time when their economy is cooling off. Comparisons to Japan thirty years ago are appropriate and China seems to be concerned about following the same path into economic stagnation. There has been money flowing out of China for years is wealth investors there have been hedging their bets. Chinese banks and exporters in heavy industry are at substantial risk of a hard landing due to a debt collapse and loss of external markets. However, China has $3.25 trillion dollars in cash reserves which will provide a cushion if needed. It should be noted, however, that they had nearly $4 trillion in reserves just four years ago.

To sum up, there are safe investments in China, safe investments for seniors and safe investments for beginners. The first trick will be to invest in companies you can track. This means investing via ADRs. And, the second is to pick companies with a strong consumer focus in the still-expanding Chinese economy.

Business Debt and Margin of Safety

When Steve Jobs came back to Apple he reinvigorated the company and generated lots of profits. He also built up a huge stash of cash so that the company would have a margin of safety in case of a business downturn.

Successful long term investors look for stocks that are likely to provide strong cash flow, return on investment, and a degree of security over the years. The security in owning a good stock comes from its margin of safety. The official definition of margin of safety is that it is the difference between the market price of a stock and its intrinsic value. However, there is more to the intrinsic value of a stock than a quick look at expected financial over the years. Finding the margin of safety of a stock may be easy and finding the margin of safety of a stock may take a little research and thought.

Money in the bank instead of excessive debt is a comfortable margin of safety. Netflix has been in the news again as its stock price keeps going up but Netflix is not making a profit even though they are increasing their market throughout the world. And Netflix repeatedly takes on debt to fund movie production and other costs. Amazon.com is another case in point as they borrowed in order to take over Whole Foods. The stock price is up on growth but their ratio of debt to cash on hand is going up. On the other hand Apple ended 2017 with a quarter of trillion dollars in cash reserves and Microsoft has about $125 billion in reserve. When considering how to prepare for a market correction remember that the soft underbelly of the bull market is too much debt and look for a margin of safety when you invest.

China

China has experienced economic growth over the last decades similar to what the USA saw from the years after the Civil War and again in the mid-20th century. They have been able to take on both business and consumer debt because the economy has continued to grow. But, all good things come to an end. China’s debt is not worrying investors both at home and abroad. The soft underbelly of Chinese debt is a risk to Chinese businesses and consumers and to a world full of commodity exporters who rely on China to buy their raw materials.

The Economic Times provides an example of a Chinese port with few ships that is not making money and a debt burden.

Each year roughly 60,000 ships vital to the global economy sail through the Indian Ocean past a Chinese-operated port on the southern tip of Sri Lanka. Almost none of them stop to unload cargo.

The eight-year-old Hambantota port – with almost no container traffic and trampled fences that elephants traverse with ease – has become a prime example of what can go wrong for countries involved in President Xi Jinping’s “Belt and Road” trade and infrastructure initiative.

Total Chinese debt has gone from 140% of GDP in 2007 to 256% today. This sort of debt increase invariably ends up causing severe economic damage.

US Tax Cut

The USA has cut taxes, which is probably going to help the economy in the short term, unless a trade war torpedoes the economy. But over the long haul this is another nail in the debt coffin.

Japan: Economic Powerhouse to Deflationary Economy

Japan growth was spectacular for decades after the Second World War. Technological advancement along with cheap labor and a managed currency put Japanese products in homes worldwide. Then, as the Japanese labor force aged and demanded higher wages Japan started sending jobs offshore, mostly to Southeast Asia.

Taiwan, Singapore and South Korean had similar experiences. All of these countries had centralized economic planning, used currency manipulation and had the advantage of cheap labor in their growth phases. And all of them were forced to pay higher wages to an aging labor force. The answer for each of these economies has been to stimulate internal spending and loosen the authoritarian grip on their markets. Japan and the rest have evolved into healthy and stable modern economies. China is hesitant to convert to a more liberal and less authoritarian controlled economy for fear that the Communist hierarchy will lose control.

The place where new growth is occurring in Asia is in the Southeast of the continent and the islands offshore. This is the region of ASEAN, the Association of South East Asian Nations. A hint of what is going on there comes from an article in Bloomberg about a commodity rebound in the region.

China may be slowing, but a commodities rebound is under way and the world’s biggest miner knows where the next growth story is building – emerging economies in Southeast Asia.

Combined gross domestic product in the ASEAN-5 nations – Indonesia, Thailand, Malaysia, the Philippines and Vietnam – will rise about a third to $3 trillion in the five years to 2020, fueling commodities-intensive infrastructure projects. Momentum like this across Asia will help maintain and increase commodity demand, BHP Billiton Ltd.’s Chief Executive Officer Andrew Mackenzie said this week.

These are the same nations that are concerned about China’s territorial ambitions in the South China Sea and general dominance in the region. Thus trade among China’s neighbors and excluding China may become a strong feature of the region and a reason to invest in Asian stocks outside of China and centered on the ASEAN nations.

ASEAN Summit

This week President Obama attends to ASEAN summit in Laos, an indication of the importance that the U. S. government places on the region. J. P. Morgan writes about growth opportunities in the ASEAN region.

With a population of more than 600 million and a nominal GDP of $2.31 trillion, ASEAN (the Association of Southeast Asian Nations), made up of Brunei Darussalam, Myanmar, Cambodia, Indonesia, Laos, Malaysia, Philippines, Singapore, Thailand and Vietnam, is fast becoming a major economic force in Asia and a driver of global growth. As the economies of neighboring China and India decelerate, and as the U.S. shifts its focus to the East, the region is increasingly becoming a destination for investment.

In spite of challenges, ASEAN’s economic performance continues to outpace the rest of the world. The Asian Development Bank estimates the bloc’s GDP growth at 5.6% in 2014, up from 5.3% in 2013.

Should you invest in Asian stocks in the ASEAN region consider ADRs or funds that focus on this area.

Should You Invest in Asian Stocks? PPT

Cash Flow from West to East

Think of it this way. China sells products to Europe and North America, and the rest of the world. China runs a big trade surplus. China spends its money on a big Russian Chinese energy agreement. China takes energy supplies away from Europe. In addition, the Russian Chinese energy agreement includes joint oil exploration efforts offshore from Russia.

Price, Always Price

According to press reports, all is not well with the Russian Chinese energy agreement. There are smaller nations across the globe where China can gain oil, natural gas, and other resources a bargain basement prices in return for loans and foreign aid. However, Russia still has a larger economy to sell energy products to, Europe. According to press releases the Russian Chinese energy agreement has been agreed upon in its general terms. But, price is still an issue and not all projects may come to completion as the old communist allies haggle over price like the capitalists that they have become.

Just Two BRICS out of Five

The shape of the world to come is changing. Brazil, Russia, India, China and South Africa are collectively known as the BRICS nations. They have strong and growing economies that are expected to eventually reach the level of both Europe and North America. Gone are the days when first the Europeans and then the Americans dictated terms for economic agreements across the globe. In both of our articles, Three Good Offshore Investment Ideas and Investing in Foreign Stocks, we noted the opportunities of investing offshore. The new Russian Chinese energy agreement is only one example of economic activity and investment opportunity outside of North America. The fundamental issue in investing in these situations is learning and understanding the fundamentals. Because many investors do not speak Russian or Chinese, it is often more efficient and profitable to invest in Western companies that do business in these regions of the world or to invest in foreign stocks listed as American Depository Receipts on US stock exchanges. Such investments can be directly related to big news issues such as the Russian Chinese energy agreements or more often related to the rise of a significant middle class in China, Russia, India, Brazil, and South Africa.

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Stimulus in China

China has used economic stimulus by the government to support its lagging manufacturing sector over the last few years since the onset of the 2008 recession. Interest rates have been kept low and the government has poured money into infrastructure projects. Chinese economists predict a rise in economic growth into the eight percent range. An optimistic read of the situation is that China specifically and Asia as a whole are in the recovery phase of a traditional recession. If fundamental analysis of the Chinese manufacturing increase is consistent with a routine economic cycle it could well be time to buy Chinese manufacturing stocks. As with the USA and Europe, investors are well advised to watch what happens as government stimulus tapers off and the Chinese manufacturing sector must grow on its own.

Bull or Bear on Chinese Stocks

Despite a generally favorable response to the announced Chinese manufacturing increase, the composite index of stocks fell on the Shanghai market. This may be a matter of buying on anticipation and selling on the news. Over the long term a major issue for China is the ability of the world to buy more and more Chinese products. Europe had been China’s number one customer. Now, as the Euro Zone lingers in debt and recession Chinese industry needs to look elsewhere for customers. Raw materials are always a concern for a growing industrialized economy. As China extends it political as well as its economic clout, it hopes to secure customer bases as well as access to raw materials. However, as the USA found out over the years, being perceived as the country with all of the power and money puts a nation in a different light. The political as well as economic cost of buying favors and getting access to raw materials as well as markets can become costly and become a burden on those at home. If you are investing in foreign stocks, Chinese stocks certainly deserve a look. But, remember Japan at the end of the 1980’s. The nation seemed to be set to take over the world. Then a set of handshake, good old boy, loans was disclosed and the Japanese economy went flat line for over a decade. China is still not a transparent society. The apparent Chinese manufacturing increase sounds good but just how good is the data? Investors in China are advised to constantly do their homework and check their results.

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When and Where Will the Market Bottom Out?

To profit from a global stock selloff an investor will need to go back to the basics. Fundamental analysis will help him decide just how low a give stock will fall. Technical analysis will help him spot a turnaround in market sentiment in order to most accurately enter the market near the bottom. The decision will not begin with picking a given stock but rather with picking a market. Has Japan already bottomed out due to the effects of the tsunami? When will China hit its low point in exports? Will overlooked stocks in the Euro Zone prosper in the long run with a weaker Euro? To profit from a global stock selloff one still needs to look at individual markets and then at individual stocks in search of the best opportunities.

A Close or Distant Time Horizon

When will an investment in a weakened stock turn to profits? To profit from a global stock selloff one needs to pick the most promising stock at the bottom of the market. The most promising stock may be one that is likely to rebound in weeks or months based upon changes in market sentiment. Or the best stock to profit from a global stock selloff may be a stock with very long term growth potential. Long term growth potential may well be the case with Europe. The likely solution to the debt dilemma will be for the Euro Zone to spend its way out. This will likely cause a substantial devaluation of the Euro. That same devaluation will make European products more competitive than they have been for years if not decades. A weakened Euro may well lead to stronger Euro Zone companies, more competitive products, surging Euro Zone stocks. One may choose to invest in Japan , invest in Russia, buy depressed Chinese stocks, or buy stocks in the USA. Whatever stock the investor chooses he will want to optimize his potential for profit from a global stock selloff by making the best market and stock picks and then tapping into market sentiment with technical analysis in order to buy and sell at the most profitable times.

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Oilsands are bituminous sands, also referred to as tar sands or oil sands. These are mixtures of water, clay, sand, and a very viscous form of petroleum known as bitumen. The largest deposits in the world are in Venezuela and Canada. Until oil prices rose substantially it was not profitable to extract the deposits in Canada. It requires refining on site in order to make oilsands less thick and to remove non petroleum constituents. Then the resulting product needs to be transported for further refining. Here is where there is an issue with China oilsands investment. According to news reports Chinese energy companies would like to use the huge oilsands deposits in Canada but have insisted on a substantial upgrade and enlargement of pipeline capacity to move the oilsands distillate to the Canadian West Coast for transport to China. As demand for and extraction of oilsands increases the strategy of investing in growing companies will likely include investing in companies involved in extracting, refining, transporting, and exporting oilsands petroleum products.

Profitable investments today still include energy products despite the apparent chaos from civil war in North Africa to the terrible earthquake and tsunami that struck Japan. The Chinese industrial machine continues to grow. China is increasing investment in its infrastructure for internal consumption as well. Thus we can believe that the estimate of a near doubling of energy needs in a generation is likely correct along with the assumption that much of the energy needed will come from China oilsands investment.

An issue with oilsands is that it requires petroleum to extract petroleum from oil sands. The process of extraction involves steam injection and then refining is necessary just to product the equivalent of crude oil before that is further refined. The extraction to use of oilsands produces as much as 45% more greenhouse gases than convention crude oil. Nevertheless, energy needs are increasing throughout the world and as the recession finally mends itself the price of oil will rise again. These factors will drive the extraction of oilsands and China oilsands investment along with the development of transport facilities from the oil bearing sands of Alberta to the Canadian West Coast or South to the USA. How to invest in stocks in the arena will be to research the companies and learn about just how profitable it is to extract, process, transport, and sell this petroleum product.

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If you are Wal-Mart you will go ahead with plans to buy more property for stores in what is turning into the world’s largest market for groceries. If you are Starbucks you will increase your presence as an increasingly affluent Chinese populace develops a taste for gourmet beverages. Investment in China can most easily take the shape of finding what stocks to invest in that have a presence in China. The Proctor and Gambles and 3Ms of the world have been in China from the beginning of its conversion to a quasi capitalistic economy. Others like Wal-Mart have a strong presence. In the beginning many companies developed relationships and invested in China in order to produce products cheaply to sell back in their home markets. Now China itself is becoming a major market and many factories that used to produce for overseas consumers are producing for domestic consumption. With the Yuan rising in value against other currencies selling in China becomes increasingly profitable.

Large scale direct investment in China requires a presence in the country, a facility with the language, and familiarity with the business culture. These things take time, patience, and skill. There are companies that can ease the way with introductions and advice. For the late comer to this scene partnering with a local business may be the best choice as it fast tracks access the China’s markets and its labor pool. The problem for many with technical expertise entering China is to retain the keys to high technology while taking advantage of what China has to offer. Too many have set up shop in China only to see their products and their technical secrets copied in a market that does not provide the protections seen in Europe and North America. What makes you a successful investor anywhere can be applied to direct investment in China. The investor will need a clear idea of what he intends to accomplish. If he is investing by way of buying stocks in Wal-Mart, 3M, or Proctor and Gamble he will want to have a clear idea of their game plans. No matter what the route into direct investment in China there appears to be the potential for long term profits as well as risks for the unwary.

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