One of the largest mistakes stock investors make is to only invest within the United States. While there is no question that tremendous opportunity exists in the U.S. stock markets, global markets can often provide substantial upside potential.
Holding a geographically diversified portfolio can not only produce outsized gains, it can help protect against downside by protecting against economic system shocks.
While the choices of geographically diverse investments is wide, one nation stands heads and shoulders above the others in terms of upside potential and provides the ideal portfolio diversification for stock market investors.
I first learned about the enormous potential of this nation when I read the ultra-successful hedge fund manager, Jim Roger’s book Investment Biker. The book chronicled his round the world journey on a motorcycle to obtain a “boots on the ground” view of global investment opportunity. Jim was so enamored with the potential of a single nation that he moved himself, wife, and new baby from Manhattan to settle permanently in this exotic nation.
Recently, this country has obtained somewhat of a bad rap in the stock investment community. You see, growth has slowed down and there are a few shifty companies operating there. This has spooked many investors despite growth remaining very high and a huge number of ultra-successful, profit-making companies.
The fact is that this economy still boasts the highest growth rate in the industrialized world. In any other nation, the growth rate even after the slowdown, would be off the charts. This growth rate remains at such a level that this economy is slated to overtake the United States as the number one economy within the next decade. In fact, some pundits are stating that it has already surpassed the United States on many fronts.
If you haven’t guessed it, I am talking about China. The Chinese stock market is on fire despite the recent waves of negativity.
There is no worry about liquidity in the Chinese stock markets. Several days this year, trading on China’s major stock exchanges has grown to over $210 billion during several sessions. This represents nearly four times the session volume on the New York Stock Exchange.
At the same time, China’s per Capita GDP remains sharply below other industrialized nations such as the United States, Japan, and Germany. What this means for investors is that there is monster upside potential as the per capita GDP slowly catches up with the rest of the industrialized world.
You see, China’s middle class is expected to grow to 700 million which is creating a monster market across the board. This explosive growth away from the rural areas into the cities builds a middle class that will spend, spend, spend!
Now, to be sure, there is a way to place the odds in your favor to maximize gains when investing in China. This tactic also helps reduce the risk of fraudulent companies and other shenanigans.
This tactic entails only investing in a certain type of Chinese stock. This stock type is called Chinese A-shares.
China’s A-shares are the renminbi-denominated shares of companies incorporated in mainland China and traded on the Shanghai and Shenzhen exchanges. Renminbi is the official Chinese currency.
The reason I love the Chinese A-share sector right now is the fact that they are trading at historically low P/E ratios. This means that there is tremendous fundamental upside potential.
China is taking aggressive steps to increase its stock market value. Among the top ways is the “Stock Connect” policy.
This program encourages foreign investment directly into the Shanghai stock exchange. Shanghai-Hong Kong Stock Connect is the first governable and pliant channel for conjoint market entree between the Mainland and Hong Kong by a broad range of stock investors.
Eligible investors in Mainland China can buy eligible shares listed on the Hong Kong Stock Exchange via their broker of choice. At the same time, Hong Kong and international investors will be able to purchase eligible Shanghai-listed A shares via their broker.
The way it works is that all Hong Kong and overseas investors will be allowed to trade eligible shares listed in Shanghai. However, only Mainland institutional investors and individual investors who have RMB500,000 in their investment and cash accounts are eligible to trade Hong Kong-listed shares.
It is critical to note that just A- shares listed in Shanghai will be included in the initial stage. Hong Kong and overseas investors will be able to trade certain stocks listed on the SSE including all constituent stocks from time to time of the SSE 180 Index and SSE 380 Index, and all the SSE-listed A shares that are not included as constituent stocks of the relevant indices but which have corresponding H shares listed in Hong Kong, except for those not traded in RMB and included in the “risk alert board.
The next bullish reason to invest in China is another policy change.
Since 1995, foreign investment in China has been guided bythe Catalogue of Industries for Guiding Foreign Investment.
The categorization of industry sectors is restructured approximately every three years in order to replicate the government’s then dominant economic and political goals and policies.
On March 10th, the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”), the two principal authorities in charge of foreign investment in China, issued a new version of the Catalogue. The new Catalogue took effect on April 12, 2015.
The latest revision represents a more marked change than was seen the last time the Catalogue was revised, indicating that the government is focused to attract foreign investment.
The government’s enthusiasm is particularly strong when it comes to foreign investment in advanced and green technologies.
What is most interesting that even traditionally state run businesses such as railways and eldercare facilities are robustly being touted as investments for non-Chinese investors.
These changes are radical for the once state run economy. As the forces of the free market work their way into China, the stock market is certain to continue pushing higher.
What’s The Best Way To Invest In China’s A-Shares?
I like the db X-trackers Harvest CSI China A-Shares Fund ETF (ASHR) as an ideal way to gain exposure to China’s A- shares. The ETF provides diversified coverage and is the only one to offer direct exposure.
Deutsche X-trackers Harvest CSI 300 China A-Shares ETF targets investment results that correspond generally to the performance, before fees and expenses, of the CSI 300 Index. The CSI 300 Index is designed to reflect the price fluctuation and performance of the China A-share market and is composed of the 300 largest and most liquid stocks in the China A-share market. ASHR is sub-advised by Harvest Global Investments Limited.
Financials, Industrials and Consumer discretionary make up the three largest sectors of the ETF.
As you can see from the price chart, shares have been in a sharp uptrend therefore purchasing the momentum makes investment sense.
The Key Takeaway
Always remain flexible and look outside the United States for profits and diversification. Despite the recent slowdown, China remains a powerful investment opportunity. The government is encouraging foreign investment which should continue to send the stock market higher. This governmental support combined with a rapidly growing middle class creates a very bullish environment for equities.
Chinese A-shares are trading at historically low P/E ratios meaning there is tremendous fundamental upside potential. The easiest and most diversified way to invest in China’s A-shares is via the db X-trackers Harvest CSI China A-Shares Fund ETF (ASHR).