Taking Stocks of China (The Upside of 25 Million Single Drunks)
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Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia. He currently manages a group of six ETFs covering the consumer, energy, financial, industrial, material, and technology sectors of the Chinese economy.
Nick Slepko: Even though the weighting of your ETFs are largely determined by market capitalization, is there any one company in the two hundred that make up the six funds which sticks out as your mind as showing the most promise?
Alex Ashby: One company we find particularly interesting in the Global X China Consumer ETF (NYSEMKT: CHIQ)] is Tsingtao Brewery (NASDAQOTH:TSGTY), which is a company that many American investors have probably heard of but may find difficult to access. This is obviously a company that is expected to benefit from the rising middle class in China and growing purchasing power of the population, but it is also an interesting demographic play. Some analysts are estimating that by 2020,China will have approximately 25 million bachelors as a result of the country’s one-child policy. Statistically speaking, single men tend to be the largest consumers of alcoholic beverages, which puts a company like Tsingtao in a good position to benefit from both changes in consumption as well as demographics.
Slepko: When Global X CEO Bruno del Ama talked about Latin American ETFs, he mentioned that the popular iShares MSCI Brazil Index ETF (NYSEMKT: EWZ) was somewhat flawed for those wanting a “Brazil play” since Vale and Petrobras were such globally-tied companies that they really weren't Brazilian anymore. What about China? Are there particular China ETFs that are similarly popular and similarly flawed? Also, with your Global X China Energy ETF (NYSEMKT: CHIE) – in which four oil and gas companies account for almost 40% of the holdings – how do you respond to similar criticism?
Ashby: I wouldn’t say the broad-based ETFs are flawed, but I think people sometimes assume they are getting exposure to the domestic China story when in reality they are getting more exposure to large multinationals and often getting more exposure to certain industries than they expect. Any broad China-focused ETF that uses a market-cap weighting could run into this issue since most of the large companies will have more of a global presence, as with [the iShares FTSE/Xinhua China 25 Index ETF (NYSEMKT: FXI)] where many of the names have significant operations outside of China and the exposure is almost 60% financials – and less than a 1% allocation to consumer-focused companies.
The Chinese economy, the second largest in the world, is now at a point were there are enough [public] companies and segmentation in the market that sector investing is not only possible, but makes sense for more sophisticated investors looking at China and wanting a specific type of exposure.
The sector ETFs provide specific exposure to the industries investors are betting in, and because each fund is broken down by sector you get a much larger representation of mid-cap and small-cap companies that are more likely to have a domestic focus. I don’t think you necessarily want to exclude the largest companies because they are active in the local market as well, but the more mid- and small-cap companies that are included, the higher the likelihood these companies are more exposed to the domestic story rather than the global one. That’s not to say that one exposure is better than the other, but the differences are pretty significant and is something investors should be aware of when determining how to get access to a market like China.
Slepko: What other emerging markets are sophisticated enough for this sector approach?
Ashby: First of all you need about twenty fairly liquid companies to create an index and a fund. In addition, the size of the economy and investor demand are important factors. Like China, we view Brazil as a similar situation which is why we have our Brazil consumer and financial sector ETFs, both of which follow the rise of the emerging market consumer and their middle classes. India is also one that others are focusing on. Another thing you are starting to see more of are regional ETFs broken down by sectors.
Slepko: Even people who hold low opinions of China have investments there. What has it been like attracting investor interest?
Ashby: When we brought these [six China sector ETFs] to market in late 2009 and early 2010, there was a lot of interest. The China Consumer ETF has remained the largest and most popular because the story is pretty compelling. The China Industrials ETF (CHIM) and the China Financials ETF (CHIX) also gathered assets quickly as it was a time when people were more bullish on China, there were issues in the US, and people were looking for growth opportunities elsewhere. As the talk of a hard landing and slowdown in China set in, we saw gradual outflows in the funds, though the China Consumer has stayed strong. With the latest statistics in China showing significant growth and suggesting that a hard landing is unlikely, and the change in leadership [in China], interest seems to be slowly coming back. The fact remains that finding growth anywhere in the world is difficult and China remains the main source of growth globally. Now you can invest in this growth at very compelling valuations.
[continued in “Hong Kong Safer Than US Exchanges?”]
Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!