I have a story in this week’s magazine about ways to play the China stock market crash, if that’s your predilection. It can also be read as ways to re-adjust your portfolio to cut back on exposure to China. As usual, not all of the ideas that managers and analysts suggested made it into the article.
For example, there are more non-Chinese stocks benefiting from China’s growth. Shipping and ship building companies have been big beneficiaries, Scott Snyder, who the manages the ICON International Equity Fund (Symbol: IIQAX ), notes. His top holdings as of September 30 included Hyundai Mipo Dockyard in Korea and U-Ming Marine transport in Taiwan.
Another idea that didn’t fit is to stick with high-growth, overseas opportunities and avoid China by using an actively managed mutual fund that has made the switch for you. Several strong performers have reduced or eliminated their exposure to China including the Lazard Emerging Markets Fund (LZOEX), which owns no China stocks. Some managers and strategists say small-cap and mid-cap stocks in developed countries offer high-growth potential without the sky-high risks of China. “That’s the real opportunity now,” says Randy Carver, president of Carver Financial Services, a unit of Raymond James based in Mentor, Ohio. He recommends the ING International SmallCap Fund (NTKLX) and the Columbia Acorn International Fund (LAIAX). These funds seek overlooked gems like Germany’s SGL Carbon AG, which makes carbon fiber products and has raised its earnings outlook twice in the past six months. Both mutual funds have been only about 20% more volatile than an index of all non-U.S. stocks, according to Morningstar, considerably less volatile than China’s market (Hong Kong was down 5% at one point last night and finished up 1%!).
And what about country substitutes? China’s economy may be among the fastest growing in the world but there are other high-growth opportunities with more reasonable valuations. Fund managers say investors pulling money out of China should consider companies or funds focusing on India, Brazil and Malaysia. “The first place I’d go is India,” says Brett Hammond, chief investment strategist at TIAA-CREF. The country is growing rapidly, though slightly lagging the rate of China, has a better educated work force than China and is more focused on building better infrastructure for businesses, he says. Brazil has been cutting interest rates and fueling continued growth, says Barry P. Dargan, manager of the MFS International Growth Fund (MQGIX). His fund’s top holdings as of September 30 included Brazilian banking power Unibanco. Investors can also seek out exchange-traded and closed-end funds focused on the three countries.
More reasonably priced alternative energy companies, one of the most overheated sectors in China, abound in Europe, says Leonardo A. Vila, manager of the Federated International Small Company Fund (ISCAX). Chinese solar companies have experienced some of the wildest gains of all. JA Solar Holdings has quadrupled since going public in the U.S. in February. Vila favors Spanish biofuel maker Abengoa and SolarWorld AG from Germany. “They’re reasonably prices and they haven’t run up nearly as much as the Chinese listings,” Vila says.