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In the lap of luxury goods

28 Nov 2012 SYDNEY MORNING HERALD
BY OPINION - PHILIP WEN


Investors wanting to make money in China should focus on the aspirations of its burgeoning middle class.

For the past two decades, it hasn't taken much effort for most Australian share portfolios to benefit, at least in part, from the breakneck economic growth in China.

The pace of construction there - and in Asia generally - has fuelled unprecedented demand for steel, therefore our top export earners are iron ore and coal. Simply holding the likes of BHP Billiton or Rio Tinto would have delivered solid returns.

But the slowdown in the global economy, particularly in Europe and the US, has had a flow-on effect on China and much attention has focused on the sustainability of that country's growth.

Having undergone a once-in-a-decade leadership transition in Beijing this month, analysts are divided over whether the new team will undergo urgent structural reforms to shift China's GDP magic mix from an investment-led formula (through the construction of super-size infrastructure projects) to a more sustainable domestic-consumption model (by getting an increasingly wealthy population to spend more). Put simply, the returns from resources stocks may not be as easy to pocket as they have been.

But what does this mean for mum-and-dad investors nursing lethargic super returns and seeking greater exposure to a Chinese economy still tipped to grow at more than 7 per cent a year?

"Super funds by their nature are very conservative they're always going to be big holders of Australian equities and fixed interest ... it's very hard to change that psychology, particularly after the global financial crisis," a former Beijing-based fund manager with AMP Capital, Kevin Yeoh, says.

For those wanting a fund manager to do the work, large institutions, such as Platinum Asset Management, Maple-Brown Abbott, Challenger, and AMP Capital, all offer variants of China or Asian equity funds. There is also the option of exchange-traded funds, or ETFs, which essentially track the performance of broad Asian sharemarkets.

For the adventurous, however, most online share-trading platforms allow the option of trading directly in international markets. This includes access to Chinese companies traded on the Hong Kong exchange. (Share trades on the Shanghai exchange are limited to qualified foreign investors - generally large institutional traders.)

Yeoh warns that any sort of direct play requires research, but he has some handy tips. He says investors should look at what the Chinese will want to buy during the next decade. He also prefers established Western companies with a healthy exposure to China's growth, notably luxury-goods companies.

"Generally, you would think that the corporate governance would be better for Western companies," he says. "There's going to be more disclosure, and it's a lot easier to understand a luxury-goods company generally than some sort of Chinese internet company.

"In terms of thematic investing, I would look at a luxury-goods company like Prada. If you look at its sales, China is already one of the largest markets in terms of the geographic breakdown."

The benefit of a luxury-goods play is that it's not just a play on brands, but also on the booming Chinese travel market. Chinese tourists often load up on luxury goods because they are cheaper than back home.

The downside is that the appeal of luxury brands can be fickle, and the saturation of brands could render them unpopular. "[Shanghai women] always pride themselves as the most sophisticated and elegant and most open to the West," Yeoh says. "When they see the mistresses of the Shanxi coalminers wearing Louis Vuitton ... they need to be wearing something else."

This burgeoning middle class has also meant demand for produce (meat, dairy, nuts) is growing strongly. China's central government has instructed its state-owned firms to find agricultural assets not as an investment in food security.

The few quality agribusinesses remaining on the Australian stock exchange could be considered takeover targets from a hungry Asian continent.

This is general advice. Readers should always seek independent financial advice.

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