2008-05-19

Get More Exposure to China, According to “Random Walk” Author and Professor Malkiel

Princeton Professor Burton Malkiel is well-known for many reasons, but for me, I associate his name with the book, A Random Walk Down Wall Street, and its oft-quoted passage about a blindfolded monkey:

A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by the experts.

(If you’re interested, here are links to a review of that book and a follow-on book: Book Review: A Random Walk Down Wall Street (at Zen Personal Finance); The Random Walk Guide to Investing: Ten Rules for Financial Success (at Get Rich Slowly).)

Professor Malkiel says U.S. investors are “underweight” in their exposure to China. (See Listen to the professor: Princeton's Burton Malkiel says U.S. investors are underweight China (at Marketwatch).)

Professor Malkiel’s apparently been talking up China for at least a few years, building on his 2006 book, From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy. (For more description, here’s a non-sponsored link to Amazon’s listing for From Wall Street to the Great Wall: How Investors Can Profit from China's Booming Economy.) Here’s an excerpt from the “inside flap” of the book:

China is positioned to rule the economic world in the coming decades. Western producers find it impossible to compete with China's 60-cents-per-hour average labor costs, and its manufacturing sectors continue to grow exponentially. Export markets are flooded with high-quality, brand-name consumer goods produced in China. In addition to fueling China's dynamic growth curve, this exploding industrial sector has created a new class of worker with unprecedented disposable income and the desire to spend it on, of course, Chinese-produced goods…. China is the most populous nation on earth. As it emerges from decades as a controlled economy, its financial markets are showing every sign of following suit.

In a recent speech discussed in the MarketWatch article, Malkiel gives stats on this—stating that China’s economic growth averaged 9%-10% per year over the last 25 years and was over 11% both in 2006 and 2007. He says this growth—unprecedented in world history—is sustainable at a high level (if not over 10%), though there are many risks:

Aside from market ups and downs, he said risks include some geopolitical tensions with Taiwan and Japan, environmental issues, corruption and an uneven distribution of income, though he said none of these would sway him from the country right now.

Still careful selection of China stocks is key, especially when it comes to the jittery investor. “The best that China has to offer investors is a mix involving direct and indirect shares. It's a lower-risk way of getting involved,” he said.

As to “direct” investments, Professor Malkiel mentions:

  • iShares FTSE/Xinhua (FXI)
  • Claymore/Alpha China Real Estate (TAO)

And on “indirect” investments, Professor Malkiel mentions several U.S. companies that do business in China and benefit from its growth:

  • Yum Brands, Inc. (YUM)
  • The Coca-Cola Company (KO)
  • FedEx Corp. (FDX)
  • McDonald’s Corp. (MCD)
  • PepsiCo Corp. (PEP)

Malkiel expects more ups and downs and says, “investors must be committed for the long haul.” He also suggests getting into China gradually through dollar-cost averaging.

Dying for more detail? I came across the video below of a speech Professor Malkiel gave in April 2006, titled, “Investment Opportunities in China.” It seems to pre-date his book on China, as he mentions the book will be coming out and what its tentative title is. In the video, Professor Malkiel says return on equity investments in China will out-pace those in the U.S. by at least a couple of percentage points. Over a long period of time, a couple of percentage points is pretty much monumental!

I haven’t made it through the whole video, which runs over an hour. Be forewarned—Professor Malkiel may be a brilliant mind, but he is not what I’d call a riveting speaker; and he gets into some fairly technical detail here and again.

Related Posts:

Allocate 50% to Non-U.S. Stocks, According to Wharton Professor

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