Go East, Young Man

 | Apr 25, 2012 | 10:00 AM EDT
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My feet are now firmly on U.S. soil after a week in China, and I'm returning from my time abroad with a bullish outlook toward the world's second-largest economy. It's a position that is tough to put into words, but I'll give it my best shot in today's column. China is a force that simply must be experienced; it's challenging to capture the raw energy and excitement in the country in written or visual form.

Most investors are well aware of the impressive statistics that sketch China's economic potential, from the rapid urbanization to staggering GDP growth to the massive foreign reserves. But there is so much about the untapped potential in China that can't be conveyed through economic statistics, pictures or other traditional media. It's challenging to communicate just how busy the country is, and how the streets are teeming with people at just about every hour (including 6 a.m. on a Sunday or midnight on a Tuesday). It's impressive to see an entire younger generation that is eager to practice English -- a skill that will no doubt enhance business opportunities in the future. The work ethic is hard to describe, and almost hard to believe even after witnessing it in person. It's a population that is hardworking, motivated and determined to deliver a better life to the next generations. In other words, the China of today shares many qualities with the America of past decades that flourished. I'm convinced that China's greatest resource is its human capital, and that asset is poised to deliver stellar returns in the years and decades ahead.

I was blown away by public transport systems that put to shame anything I've seen in Chicago, New York or any other major American city. And while there's no shortage of old, dilapidated buildings, there are also sparkling skyscrapers and glimmering mega-malls that are on par with modern Western structures. Things just seem to be happening more quickly and with more purpose in China. Again, it's a phenomenon that is difficult to put a finger on but unmistakable in its presence and importance.

As I wrote recently, many broad-based global equity ETFs tend to dramatically underweight Chinese stocks; iShares MSCI All Country World Index (ACWI) makes an allocation of only about 2% to China, while the U.S. represents about 50% of holdings. It's a bit of a shame that many investors have relatively small positions in Chinese stocks; they've missed out on some impressive rallies in recent years, and could continue to miss out as the Chinese economy expands.

I've been an emerging-markets bull for a long time, overweighting this asset class in my personal portfolio. But I come away from my recent travels with the view that I should be making an even bigger allocation to Chinese stocks. There is perhaps some volatility ahead in the short term; no risky asset class is immune from the ups and downs to which we've become quite accustomed. But over the long haul, the Chinese market is an opportunity without comparison that is certain to deliver strong gains to investors.

A number of China ETFs on the market allow for cheap, efficient exposure to this market. An interesting option is the iShares MSCI China Small Cap Index Fund (ECNS), which holds the smaller publicly traded companies in China. ECNS steers clear of the larger, mega-cap companies that tend to count the Chinese government as their largest shareholders, helping to avoid potential pitfalls while also getting investors "closer to the ground" in China.

Another interesting choice is the EGShares China Infrastructure ETF (CHXX), a fund that targets companies that stand to benefit from the country's tremendous growth spurt. I was struck by the massive demand for transportation in the country; roads, subways and railway stations were constantly crowded (though still relatively efficient), and every town I visited was bristling with construction activity. Cranes should be the national bird of China; it's hard to find a view that doesn't include evidence of new buildings and roadways in progress. Infrastructure spending is going to skyrocket in coming years, and many of those yuan will be paid out to the firms that comprise CHXX.

Again, my unbridled optimism for Chinese investments is over the long term; I'm sure that there will be some short-term bumps in the road. But the long-term prospects for China are so bright, investors should be wearing shades.


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