Buy at home for good fortune

Local stocks offer the best option to access Asia.

Local stocks offer the best option to access Asia.

Investing in China isn't for the faint-hearted. While the world's second-largest economy is growing at a near 9 per cent a year, inside China there are boom (energy) and bust (housing) sectors and picking winners isn't easy.

China, and many other countries in the region, do not operate under the same legal and accounting systems as Australia, making it tougher to understand and assess companies.

Also, regulatory oversight and directors' duties are not always as stringent as they are under local rules.

It's not easy for a retail investor to buy equities directly. Most rely on managed funds or buy exchange-traded funds that mirror equity markets in the region.

But a less-risky method of gaining exposure to Asia is to buy local stocks that are leveraged to China and that region.

The option is relatively simple, alleviates exchange-rate risk and gets investors' regulatory, legal, accounting and directors' duties safeguards that might not otherwise be available.

The big miners sell the majority of their products - iron ore and coal - to the Asia-Pacific region. BHP Billiton earns about 63 per cent of its revenue from China and surrounding countries (see table below). The figure for Rio Tinto is about 60 per cent and for Fortescue Metals the figure is probably close to 100 per cent, according to research from Merrill Lynch.

"Almost all the major iron ore and coal companies are exposed to China and are particularly affected by the price of commodities," an equity strategist at Merrill Lynch, Tim Rocks, says.

"And then there's the next level down - the companies that feed into the mining companies. These are mostly the mining service companies. They are more leveraged to volumes, rather than commodity prices, and that's a much less volatile environment."

These companies include contractors Leighton Holdings and WorleyParsons, drilling and blasting group Ausdrill and one of last year's best-performing S&P/ASX 200 companies, geological testing company Campbell Brothers. Explosives companies Orica and Incitec also fit into the category.

"There are some other direct plays but these tend to be smaller relative to the local business," Rocks says. James Packer's Crown Casino, recruitment group SEEK and implant manufacturer Cochlear are examples.

Professional investors say that in considering exposure to China and Asia, one needs to keep an eye on price-to-earnings multiples, dividends and track records. And there are companies that don't sell directly to China but benefit from the higher global prices that have flowed from Chinese demand.

Energy companies are an example of a group of companies that have benefited from China, even if they don't sell direct. Woodside, Santos, Origin Energy and Oil Search fit this category.

"I probably have a preference for some of the oil companies, like Santos and Oil Search, but not necessarily because of revenue out of China," the chief investment officer at Deutsche Bank Private Wealth Management, George Nassios, says.

"Both have developments in the LNG market. China is a manufacturing nation and it's growing. Its demand for energy is rising, putting price pressure on the global market." Nassios says his preferred portfolio would include BHP, Rio, a coal company and at least one energy company and that investors need to take time to understand what's happening in China.

"When you buy shares, you are taking risks: what is the economic cycle, how is a company approaching China's economic cycle?" he says. "China is not immune to downturns. Who are the competitors and what are the China-based competitors?"

The head of Australian equities at UBS Global Asset Management, Simon Shields, says a two-speed economy such as Australia's makes it hard to find purely domestic-focused stocks with strong prospects. "They are either being hurt by the Australian dollar or weak domestic spending," he says. "So it really is the stocks exposed to developing countries and China that are driving the market."

Shields is a fan of mineral sands producer Iluka. Mineral sands are used in the production of hundreds of products, from ceramics and TV screens to aircraft parts.

"There are only four listed mineral sands companies in the world and Iluka has the largest market share. Demand is driven by ceramic tiles and paint. As China continues to urbanise and grow, Iluka benefits," he says.

"Energy demand from China will continue to increase at a great rate in Australia, we have plentiful supplies of natural gas and that is easily transportable. That benefits Woodside, Santos and Origin.

"The other group of companies that will really benefit are the mining-services groups and we are seeing that now with an increasing pipeline of work. WorleyParsons stands out, though it's relatively expensive. Less expensive is Leighton, which is more involved in the construction of mining infrastructure.

"Boart Longyear is a standout. It's the largest drilling company in the world. With a lot of exploration and production going on, it's in a sweet spot. It's got terrific growth expectations."

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