Sunday Morning Coffee

The Pragmatic Capitalist posted an interesting chart showing the Shanghai Composite appearing to rollover. The Seeking Alpha version of the post was titled China:It Looks Like The Easy Money Has Been Made which while I think may not have been the best title, the notion of easy money being made is worth exploring and understanding.

Early on in a theme, generally speaking, is when stock selection is least important because everything goes up a lot. A few years ago I owned an oil stock for Chinese exposure for most clients and a couple of people owned iShares China 25 (FXI). I preferred the oil stock but had no qualms in owning FXI for anyone where individual stocks were not ideal. I exited China in Q2 2007 and then got back in in Q3 2008 but FXI was no longer an acceptable proxy for me because of its very large weighting in the financial sector (I have since mentioned countless times that I believe financial sector exposure in China is a very bad idea).

I would not necessarily say that Chinese financial stocks have been so bad to own compared to the broader Chinese indexes but the fundamental risk of owning them has increased dramatically. As time goes on in the life of an investment theme it makes sense to expect more and more work will need to be done to isolate attractive risk reward tradeoffs for the particular theme (in this country).

On a related emerging/frontier market note Yahoo ran an interview of Mark Mobius that yielded a couple of interesting nuggets. First of which is that he owns DP World which is the publicly traded ports business of Dubai World. I mentioned this company a couple of weeks ago. It owns ports all over the world, I mean all over. It obviously offers exposure to commerce on the ground where it has a presence and so seems like it could be a proxy for global economic activity as opposed to for just Dubai or even just in the Emirates but globally.

This is interesting and hopefully serves to get you thinking about how foreign investing might evolve in the next few years. The stock itself cannot be held at Schwab, don't know about other brokerage firms, and its price, which is well below $1, makes it unattractive as buying 10,000-30,000 shares for each client would make for huge commissions let alone the liquidity of trading it but in terms of the future, still interesting. And keep in mind that these things do evolve. We now have easy access to Vietnam and Poland which previously were very difficult.

Mobius then went on to talk about some markets that will be investment destinations in the future, or perhaps more correctly, easily accessible investment destinations. These included Pakistan and Qatar. I have mentioned Kazakhstan in this context and I believe (as do other people) that Iran will be an important investment destination at some point. The country is the 17th largest (600,000 square miles compared to about 3 million in the US) has a ton of oil and natural gas but cannot refine the oil. Assuming it stabilizes politically at some point (and maybe that takes 100 years or maybe not...) there are efficiency and lifestyle improvements that could make the country an investment bonanza.

I believe Kazakhstan has a more diverse resource base but less to overcome before being viable (corruption is huge problem for now) and there are other countries that will merit future exposure. The reason to follow them now is that it easier to be comfortable with a place you've been studying for a few years than waiting until it greenlights as a place to invest because an ETF gets issued.

The picture is from inside a seafood restaurant in Helnar, Iceland which is as close as I've ever gotten to visiting an emerging market country (of course it isn't). Oh wait, Mexico in college.