An Interview With Kevin Carter
August 28, 2008
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With a global slump taking place and commodities in retreat, many analysts are questioning whether the end of the Summer Olympic Games in Beijing will signal a prolonged slowdown in China's growth.
One of the players in the Chinese exchange-traded market is AlphaShares LLC. The investment firm runs private accounts for institutions and provides indexes targeted to global and China-based stock strategies. So far, two ETFs are using AlphaShares benchmarks: the Claymore/AlphaShares China Small Cap ETF (AMEX: HAO) and the Claymore/AlphaShares China Real Estate ETF (NYSEArca: TAO).
Kevin Carter, CEO of AlphaShares, spoke recently with IndexUniverse.com's Managing Editior Murray Coleman about China and its role in an investor's portfolio.
IndexUniverse.com (IU.com): Will China slow now that the Olympics are over?
Kevin Carter (Carter): China is already slowing. Nobody expects them to continue at a 10% GDP [gross domestic production] growth rate forever. Four of the world's five largest economies are threatening recession. China is not, although it will certainly slow from double-digit rates in the past.
IU.com: Some analysts are blaming a slowdown in commodities on China, aren't they?
Carter: Yes, but China's thirst for natural resources is still growing. They've still got a lot of people living in the countryside, and it'll be that way for another 20 years. It's been estimated that about 500 million people in China are either underemployed or unemployed. So in terms of construction, it's staggering the number of roads and airports and infrastructure still left to be built as income levels rise.
IU.com: But China's growth will be uneven, won't it?
Carter: It's a volatile market. The stock market in China makes swings of 5% or more several times a quarter. As Burton Malkiel, our chief investment officer, likes to say, China's even more volatile than Brazil, which is usually considered the poster child for volatility. Look at what's going on right now. A lot of people thought the Chinese stock market would rally right up to the Olympics and then fade afterwards. But it hasn't happened that way—China's been the worst market in the world so far this year.
IU.com: How do you invest in such a changing marketplace?
Carter: For the past 12 months, returns for Chinese stocks have been essentially flat. But within that time, they've had a huge run-up and then a huge fall-off. So it's certainly important to dollar-cost-average when dealing with stocks in that country.
IU.com: What other advice do you give to long-term investors about China?
Carter: Most people are underexposed to China. We estimate that most investors have about 1.5% of their portfolios invested in China. The way they get that is by putting something like 10% of their stock allocations into a broad emerging markets fund. Within that fund, counting Hong Kong, about 14% will include China. So that's how we get to the 1.5% figure that a typical investor may hold in Chinese stocks.
But consider that last year China had between 5-10% of the world's GDP, depending on how you measure it. But here's the kicker. About 30% of the world's GDP growth came from China. So that's our message. China is the biggest driver of world growth and most people are underweighted.