Investing in the New China Syndrome

CHICAGO Thu Dec 6, 2012 3:24pm EST

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CHICAGO (Reuters) - One of the ways to globalize your portfolio and to tap growth in emerging markets is to recognize the new China Syndrome. The world's most populous country is becoming a primary buyer for resources and technologies for its growing population.

China's growing demand will continue to boost prices on everything from farmland to oil. The country now consumes more than 40 percent of the world's base metals, 23 percent of major agricultural commodities and 20 percent of non-renewable energy resources, according to a recent report by the International Monetary Fund. Those figures are up from single-digit levels in 2000, in terms of net imports as a percentage of world imports.

There are a number of ways to invest in this trend through exchange-traded funds, but first you need to understand the breadth of its global implications.

In the view of economist Dambisa Moyo, author of "Winner Take All," China's voracious appetite for everything from aluminum to water will change geopolitics and drive commodities prices higher over time.

The Zambian-born, Oxford- and Harvard-educated Moyo visited 22 countries to detail China's influence in her research for the book. She says China has been aggressively cutting deals on every continent to acquire the resources it needs to feed its people, build infrastructure and make consumer goods. In effect, China has become a "monopsomist," a single buyer that will outbid all other parties to acquire what it needs.

"China is trying to lift some 300 million out of poverty in 30 years," Moyo said in a speech before the Chicago Council on Global Affairs on November 29. "There are more poor people in China than in all of Africa. In only eight years, the country will have 221 cities with over 1 million people." The U.S. now has 10.

China's most immediate needs, once it works through its current infrastructure boom, is food and water, Moyo said. The country is running out of arable land and fresh water, so it is buying food overseas and investing heavily in desalinization while also building dams and diverting rivers. This will create demand for more efficient agriculture, fertilizer and water production and conservation technology.

Energy will also be in greater demand. Although the U.S. is still the world's largest per-capita energy user, China is the largest overall user, according to the International Energy Agency. That will put upward pressure on oil, coal and natural gas prices and favor the largest companies in mining and oil exploration and extraction technology. The International Monetary Fund estimates oil prices will hit $200 per barrel in a decade.

In addition to energy, China will continue to pay top dollar for mineral resources such as copper. It has already purchased a mountain in Peru for its copper reserves, and it is scouring every continent to acquire more resources.

HOW TO INVEST

There are several ways to invest in the China Syndrome, largely through ETFs. Yet, you should treat them as small buy-and-hold satellite positions. They concentrate company and sector risk and are notoriously skittish, as are most commodity-oriented funds. Only dedicate a small portion of your portfolio to these funds and do not try to time the market.

If you already have broad-based emerging market holdings, you can micro-allocate to specific commodities such as copper. An exchange-traded fund such as the First Trust ISE World Copper Index, invests in leading mining companies such as Rio Tinto and Freeport McMoRan.

A similar specialized play would be in water technology companies through the PowerShares Global Water ETF, which holds companies like Flowserve and Waters Corp.

Broader approaches, though, will capture a bigger portion of profits coming from commodity price increases. The Vanguard Energy ETF holds the largest global energy producers such as Exxon Mobil, Chevron and Schlumberger.

An even more diversified basket of resource stocks would be the IQ Global Resources ETF. The fund owns major mining stocks such as Rio Tinto and BHP Billiton; processed food companies like Hormel Foods and Tyson; and old-line energy producers like Peabody and Consolidated Energy. The fund also owns positions in livestock, water, timber, grains and metals stocks.

One of the worst ways to invest in the China Syndrome in recent years has been through stocks listed on Chinese exchanges. Not only are these stocks incredibly volatile, they may not reflect the economic activity in resource acquisition outside of the country. They also may be suffering from outside investors' negative views of the country's slowing growth, which has hurt Chinese stocks. One popular ETF -- the iShares FTSE China 25 Index fund -- is down more than 8 percent over the past half decade. As always, make sure to do your research.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here; Editing by Heather Struck and Leslie Adler)

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