Posted by: Aaron Pressman on October 24, 2007
China’s stock market has almost tripled in value so far this year and investors across the globe are starting to get antsy. Lauren mentioned last week that a bunch of advisers said it was time to get out and I started cataloging the immense backlog of Chinese companies seeking to tap the U.S. market with initial public offerings. Today, we’re suddenly in very good company.
The Oracle of Omaha and greatest investor of the past few generations, Warren Buffett, says everyone should be cautious given the extreme run up. He’s already sold off his giant position in PetroChina Co. (Symbol: PTR). “We never buy stocks when we see prices soaring,” Buffett told reporters while on a visit to northeastern China today, according to a Bloomberg report. “We buy stocks because we’re confident of the company’s growth. People should be cautious when they see prices rising.”
Certainly, it’s prudent to cut back any obvious China plays in your portfolio. A 5% position at the start of the year in the $9 billion iShares FTSE/Xinhua China 25 ETF (FXI) might now be up to 10% of your portfolio and should be reduced. The tougher question, though, is figuring out what secondary damage might be inflicted by a Chinese stock debacle. We only have to go back to February, when a big drop in China prompted a 416 point drop in the Dow Jones Industrial Average.
But the harm to the U.S. market, at least in February, was only temporary. Others could be hurt more deeply by a China crash. The most likely candidates for serious secondary damage are the surrounding economies in Asia that have benefited from China’s growth as well as the worldwide commodity markets driven up by ever-growing Chinese demand for raw material. Be careful, too, with general emerging markets fund. Over 40% of the $25 billion iShares MSCI Emerging Market Index ETF (EEM), for example, was invested in stocks of China, South Korea, Taiwan and Thailand as of the end of September. And as an unmanaged index fund, there’s no one steering the ship there to trim back that exposure.
Money manager Roger Nusbaum had a useful post the other day explaining how he’s tried to craft a position in emerging markets stocks while reducing exposure to the possibly overheated China sector. He prefers Brazil. Any other good ideas out in the blogosphere?