A study in investment contrasts

The grow stage and the manage stage

Friday, September 19, 2014. This day recently had two historic events. Scotland voted to stay together, keeping their 307-year-old union. And China, with the U.S. as midwife, floated the largest IPO in history. 

Why is this important? It shows us two stages that investors need to be aware of: the grow stage and the manage stage.

I have nothing against Scotland but, looking through the lenses of an investor, it wouldn’t be a growth market. The country is merely managing the economy, worrying about an old relationship.

Now head east to China. Here’s a growth market in many ways. Their historic event was selling e-commerce company Alibaba (symbol: BABA) in the largest offering ever. Ironically, they beat the record of yet another Chinese company IPO.

As an investor, would you rather invest in a growing economy or a managing economy?

Facts back up my opinion. Scotland GDP per person grew at 1.4 percent from 1999 to 2012 (Scottish.parliament.uk). For the full year of 2012, the economy grew at just 0.3 percent (ScottishEconomyWatch.com), barely avoiding negative numbers.

China, as most of us know, has much bigger growth numbers. From 2001 to 2010 they grew at 10.5 percent yearly! Recently, they’ve slowed down but still clocked in at 7.7 percent growth in 2013 (Wikipedia.org). Add to that growth a labor force of 787 million people, the second largest economy in the world and a consumer market of over 1 billion people. Quite a bonus.

To capture this growing market, I prefer mutual funds for simplicity, diversification, reasonable fees and liquidity. My favorite is the iShares FTSE China 25 index fund (symbol: FXI). You could consider this the Dow Jones of China. It’s somewhat concentrated with only twenty-five holdings and a general play on the Chinese economy.

If you want to capture the tech sector look at Guggenheim China Technology fund (symbol: CQQQ). They don’t currently have Alibaba as a holding but could invest in it after the underlying index changes.

If you insist on individual stocks, you can now buy Alibaba shares. Or another way is to buy a “play” on the stock. The most well known is buying Yahoo (symbol: YHOO). They have a 22.6 percent stake in the Chinese company. So an investor gets exposure to Alibaba and other business interests, too. A lesser-known play is buying Japan’s Softbank (symbol: SFTBY). This company has a 34.4 percent stake in Alibaba. Some believe they have a better business than Yahoo and could be a better bet.

Whether you prefer funds or stocks, a growing economy is usually more rewarding than a sluggish bet on yesterday’s leaders.

Categories: Finance