Morningstar Advisor - Summer 2007 - (Page 63)

Sector Rap All Eyes on China Investing in China seems like a no-brainer—until you look at the valuations. by Sonya Morris Morningstar StockInvestor, who just returned from a month-long stint in China. Sonya Morris: In some ways, investing in China seems like a no-brainer. It seems obvious that the economy is going to expand rapidly, but does that automatically make China a good investment? Matt Warren: The fundamental story is there. China is now the manufacturing hub of the world, and the country is successfully making inroads into other industries as well. Scott Burns: China enjoys significant structural comparative advantages. There’s no question that strong growth and profitability will continue into the future. China is using the same playbook as Japan and South Korea did in the past. You can look at those countries’ growth paths and extrapolate from there to see where China is on the growth curve. If you think of the curve as a 25-year process, China is somewhere between five and 10 years along the curve. MW: But the troubling thing is, when they were at the same point in the growth cycle, Japanese and South Korean firms traded at multiples that only partially reflected their growth prospects, but Chinese stocks are getting full credit—and in some cases more credit—for that growth forecast. Michael Cumming: The concern is definitely on the valuation side. Strong future growth is already priced into most Chinese stocks. MW: It’s not exactly comparable to the dotcom bubble of the late 1990s, because the companies are actually producing earnings and cash flow. But it’s still an overheated market. SM: The Chinese government is heavily involved in the economy and individual companies. What’s the degree of its involvement, and what risks does it pose? SB: I’m not sure that people understand that it’s not just the involvement of the central government. There are provincial and local government officials who wield a lot of economic power, and many of these officials hold large ownership stakes in Chinese firms. China is the subject of intense investor interest, and ETFs that invest in that region have gotten a lot of attention. Morningstar also sees opportunities in China; we now have four equity analysts in mainland China. They have been working closely with some of our U.S.-based analysts, who have spent a lot of time in our Chinese offices in Shenzhen. This month, I sat down with three of those analyst—Scott Burns, Michael Cumming, and Matt Warren—to discuss their impressions of the investing environment in China. Also joining us was Paul Larson, editor of MorningstarAdvisor.com 63 http://www.morningstaradvisor.com

Table of Contents Feed for the Digital Edition of Morningstar Advisor - Summer 2007

Morningstar Advisor - Summer 2007 Contents Letter from the Publisher Get to Know the Bond “All-Stars” Research Briefs Our Stewardship Test Gets Tougher Save It for Later Too Many Oranges Best of Both Worlds No Two Clients Are Alike When It Comes to VAs, It’s Seller Beware Hands On: Finding the Suitable Fund Share Class for Your Client Fund Style Can Drift Off Course Sticking to Their Style, Through Thick and Thin Marathon Man Growth, With a Chaser A Menu of Ideas to Fill Five Market Baskets Funds: Finding Funds with Conviction Stocks: So You Say You Want Income? All Eyes on China Mutual Fund Analyst Picks Undervalued Stocks Most Popular Variable Annuities What’s New at Morningstar and on the Web The Advisor’s Economic Moat

Morningstar Advisor - Summer 2007

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