As one of major catalysts for growth, China is emerging as the dominant force in the global economy. Over the last two and half decades, China has moved from a country of substance agriculture to a major manufacturing powerhouse. Its 1.3 billion residents are experiencing job growth and creation as well as the new found wealth. As its nation expands, the demand for everyday western necessities such clean water, electricity and telecommunications are becoming more and more important. The C.I.A. estimates that, in 2008 alone, approximately 200 million rural laborers and their dependents relocated to urban areas to find work. All this urbanization and expansion leads up to a dramatic increase in the number of natural resources utilized by the Asian Dragon. Over the recent months, China has been stockpiling various commodities, including aluminum, copper, nickel, tin and zinc, giving credence to this notion.
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Investing in China Without China
While investing in China for the long term offers several rewards, many investors have far too little allocated to the country. The average portfolio has fewer than 2% worth of direct investment. Most investors cite differences in accounting standards, worries about China's communist government and its state-owned enterprises (SOE) and general emerging market jitters as the reasons for skipping the country in their portfolios. However, there are ways to play China and its growth, without direct investment. Finding a China strategy that includes stability and safety is as easy as finding where China shops.
Both Canada and Australia offer investors a play on China without the direct investment. On top of the political stability and alliances with the United States, both nations are extremely rich in a diverse group natural resources. These include vast deposits of petroleum, iron ore, copper, gold, uranium and timber, just to name a few. Essentially, all the resources needed to jump start a nation infrastructure, energy and general build up.
The easy ways for regular retail investors to participate in these nations is through exchange traded funds. While the choices are narrower, there are two standout choices, both from iShares. For Australia, the iShares MSCI Australia Index (NYSE:EWA) offers a 34% weighting towards energy and basic materials including holdings in commodity giant BHP Billiton (NYSE:BHP) and iron-ore specialist Fortescue Mining (OTC:FSUMF.PK). The ETF also yields an impressive 5.5%. For Canada, the iShares MSCI Canada Index (NYSE:EWC) gives investors a nearly 46% weighting towards energy and materials. Both ETFs charge 0.52% in annual expenses.
For investors wanting exposure to Australia via a closed-end fund structure, Aberdeen Australia Equity Fund (AMEX: IAF) provides a 24% exposure to basic materials while providing a 9% distribution rate. The fund is currently trading at an 8% premium to its net asset value.
Playing With Currency
An interesting angle to play in regards to these commodity supermarket nations is in their currencies. Both have rallied quite nicely against the dollar in recent months; the Canadian Loonie is up 21% against the U.S. dollar since its lows in March and should continue to increase long term, as the world reevaluates how it views the U.S. greenback. Rydex offers two of its popular CurrencyShares products for these nations: the Australian Dollar Trust (NYSE:FXA) and the Canadian Dollar Trust (NYSE:FXC).
The Bottom Line
China's growth offers vast profitability, if investors are able to tap into it. By shifting our focus away from direct investment and looking at alternatives, other plays emerge. The commodity rich nations of Australia and Canada give investors a way to profit from where China goes to shop. The preceding exchange traded products are a quick and easy way to gain exposure to those nations. (To learn more, see An Inside Look At ETF Construction.)
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