05/23/2009 05:12 am ET | Updated May 25, 2011

Ah So, China Is the Way to Go

Even Superman stumbles. Take, for example, the economic superman China, which boasts the world's largest population, 1.3 billion, and the globe's fastest growing economy, with a blistering GDP growth last year of 9%. Although that was a sensational showing, the best in the world, it didn't live up to a widely expected double-digit GDP growth rate because of the U.S.'s economic downturn. As a result, China's go-go roller-coaster stock market plunged more than 40% in 2008, which made it about as appetizing to many investors as a plate of cold chop suey.

That was last year, though. This year, the Chinese market is on a roll, having rebounded a whopping 47.2%. Accordingly, forget about chop suey. Given that sizzling bounce-back, such tempting Chinese delicacies as peking duck and shark fin soup might be far more appropriate food comparisons.

Tony Sagami, one of the country's leading trackers of the Asian markets, sees China's initial 2009 showing as a forerunner to even bigger gains ahead. He bases this conclusion on an analysis of the fast stepping Chinese economy, which the World Bank predicts will turn in well above average 6.5% GDP growth this year and then really start to rock and roll in 2010. In the first quarter, China posted GDP growth of 6.1%. (In the same period, a number of economists see the U.S. economy retreating 5% or more.)

Comparing his favorable Chinese outlook to what he expects from the U.S. -- which is more economic pain, more stock losses and more declining real estate values -- Sagami thinks it behooves investors to take some chips off the Wall Street craps table and begin switching to a different table, namely China, with much better odds.

Pointing to the country's $586 billion stimulus spending program, which is helping to reinvigorate the economy, Sagami praises China for using the money intelligently to revitalize its infrastructure, such as roads, plants, bridges, shipping ports, airports and dams. In contrast, he says, "we're just mortgaging our future and using our stimulus to buy toxic assets of banks, brokerages and insurance companies."

Any way you look at it, he argues, China is getting much more bang for its buck. Taking note of China's strengthening car and retail sales, rising income and wages, growing bank lending ($277 billion in March) and the availability of $1.9 trillion of foreign reserves, Sagami contends the country is reacting to economic adversity in a much wiser fashion. Reflecting this, he points to a number of resultant positive economic signs. Among them:
  • In March, China's Purchasing Managers Index (PMI) rose for the first time in six months, signaling that manufacturing is expanding again.
  • Urban fixed-asset investment rose 26.5% to $150 billion in the first two months of 2009, with the stimulus plan jump-starting housing and railway construction.
  • Direct foreign investment in China increased last month to $8.4 billion, the highest level since June of last year.
  • According to the Chinese association of Automobile Manufacturers, the Chinese bought 1.03 million vehicles in March, up 25% from the previous month. More impressive, this is the third month in a row that the Chinese have bought more cars than Americans, who bought 857,735 new autos in March.
  • Cement production increased by 10.3% in the first two months of 2009, versus the same year-ago period.
Okay, so what are the best ways to play China and other Asian markets, which should also benefit handsomely from the Chinese rebound?

For starters, Sagami, editor of the Asia Stock Alert newsletter in BigFoot, Montana, heavily favors companies that would profit from internal or domestic demand. At the same time, he would shun the exporters, which he says are dying on the vine because the rich and not-so-rich Americans aren't buying anymore.

His four favorite Chinese stocks -- each of which he thinks offers at least 10% to 20% capital appreciation over the next 12 months -- are New Oriental Education, which teaches English to the Chinese; China Communications Construction, the country's largest construction company; China Nepstar Chain Drugstore, the Walgreen's of China, and Fuel Tech, which removes pollutants from coal-fire plants.

Singapore-based celebrity money manager Jim Rogers, a long-term commodities bull, thinks the most productive way to play China is through agricultural commodities. China has built huge reserves for a rainy day and it's now raining, he says.

In an 1865 editorial in the New York Tribune, Horace Greeley wrote, "Go west young man, go west." Sagami, relating that comment to today's investment environment, says he would revise it to read, "Go east young man, go east."

A word of caution, though, if you're tempted to buy a Chinese stock: "China is like a volatile stock and 20% to 40% corrections happen all the time," Sagami observes. "That's the entry fee for playing the stock market there. It's for big boys only. Investors with a little old ladies' mentality should stick to utilities."