Investors are being urged to put their money into emerging markets like Brazil and Russia, rather than China to make the most of cheaper stocks.
Despite China’s strong economic performance Legg Mason affiliate Batterymarch say investments should be made in companies in other developing markets that are directly benefiting from China’s expansion by providing raw materials. These stocks, according to Batterymarch, offer a similar growth potential but at cheaper prices.
Claudio Brocado, portfolio manager on Batterymarch’s emerging markets investment team, said: “If you look at all of the main market valuations, Chinese stocks look expensive when compared to those in Brazil, Russia or emerging markets in general. Despite this, the eyes of the world are on China whose powerful growth is a major force in the global economy.
“We believe that the best way for investors to capitalise on this is to invest in companies outside of China that are directly benefiting from its growth. The country’s huge demand for energy, metals and other commodities to support manufacturing and infrastructure development has created very attractive equity opportunities in other emerging markets.”
Because China is rapidly expanding to feed the housing boom and infrastructure developments, steel production has increased dramatically. This has in-turn boosted Brazillian companies such as mining giant Vale, which supplies China with iron-ore – the primary raw material for steel production. During the fourth quarter of 2009, Vale derived 44% of its iron-ore sales from China and production volumes and prices for iron ore are expected to jump in 2010 and beyond.
Increasing demand for automobiles in both China and Brazil should also benefit iron ore providers for several more years – meaning increased investment potential. The recovery in global steel demand also bodes well for steelmakers in countries such as Russia and South Korea.
The soaring Chinese demand for energy to power its expanding economy has also benefited Russia. Next year the Russians will begin shipping crude oil directly to China via a newly built pipeline as part of a 20 year energy pact.
Claudio Brocado added: “The best way to capitalise on China’s economic growth is from the bottom up, focusing on individual companies with strong fundamentals.
“In today’s emerging markets environment, underlying stock fundamentals point to underweight positions in the Chinese market and the developing market energy sector – two areas with significant growth potential but relatively expensive share prices. However, they also point to overweights in materials and Russia. These indirect plays on the Chinese economy and higher energy prices allow investors to participate in outstanding growth opportunities without overpaying for the privilege.”
The suggestion to invest outside of China despite its growth comes one week after Fidelity International announced that its China Special Situations fund was named as one of the most successful new fund listings in the UK market over the last 20 years.
The popular fund, which is expected to begin trading on the London Stock Exchange next week, is designed to provide investors with long-term capital growth.
Speaking at the time, fund manager Anthony Bolton said China was the ‘investment opportunity of the next decade’
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