Is now a good time to invest in China?
With Alibaba's giant public offering looming, you may be thinking about investing in China. But just as it can be hard to invest in IPOs, there's nothing simple about investing in the world's second-biggest economy. In fact, very few U.S. investors have profited from putting their money there in recent years.
CBS MoneyWatch's Amey Stone recently spoke to Riad Younes, co-portfolio manager of the RSQ International Equity Fund (RSQIX) to help sort out the opportunities and the pitfalls of buying Chinese stocks.
Amey Stone: With Alibaba's IPO around the corner, there's growing interest in investing in China. What's your strategy for China stocks?
Riad Younes: Alibaba is getting a lot of attention. There is a lot of excitement. We have exposure to some Internet companies that are winning market share and are leaders in what they do because the second best in this sector usually is not good enough. We look for companies where corporate governance is good, which are not dependent on government policies for growth and which have owners that have shown they are friendly to shareholders.
In Internet space, Alibaba, Baidu (BIDU) and Tencent (HKG) are the three big gorillas in the room. That's where people are betting their money.
AS: Do you think U.S. investors should look to China for a long-term investment?
RY: The broad China index, if you look at it on a chart, looks like it is hitting a bottom. It is dominated by sectors and companies that investors are avoiding. The sectors that investors like -- casino and Internet stocks -- are not big enough to push the index higher.
The investor who wants to buy more broadly into China should have a view about the banking sector and the structural problems in China.
When they feel comfortable that the worst has been seen, that is the time to do it. Otherwise, maybe they are better off in a diversified mutual fund whether the portfolio manager can pick selectively what he or she thinks is attractive in China.
AS: Why have Chinese stocks as a whole underperformed when the economy there is growing so fast?
RY: China's problems and prospects are very well known . Right now there are a lot of worries about an imbalance. There is a lot of fixed-asset investment, but not at lot of consumption. Politicians have been trying for the last three or four years to bring consumption up, and it went the other way.
That tells you that the rebalancing is not going to be smooth. There are probably a lot of bad loans on the books of the banks.
So far there is an inability of the central government to maintain growth -- that 7.5 percent magical number -- while increasing consumption. When we see consumption growing while fixed-asset investment is decreasing, then we'll know the growth is sustainable.
AS: Will you buy Alibaba?
YR: It is something we are considering. It depends on the valuation, how much it jumps in first day of trading. It's a name that many big funds will buy because they need exposure to a blue-chip name.
It is very difficult to judge its valuation based on its near-term outlook. Right now we are making an effort to try to understand the company better and determine what trading range makes sense.
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