Thinking of Investing in China?

Guess what your return would have been had you invested in China in March of 1998, ten years ago.

Consider before you answer that the last ten years has been unstoppable GDP growth, a miracle in terms of economic change. China has emerged on the scene as an economic powerhouse and it is on the lips of every businessman and politician.

But before we answer how much it has been up in the last ten years, let me tease you with some of the latest stats. The first quarter was a tough one. The MSCI China index was down almost 24%, but despite that the five year average is still up over 40% a year for the past five years. Now that is a serious return and an impressive stat.

However, when we return to my original question of what China would have returned you if you had foreseen how important China was going to be and how great an investment it was, we get a very surprising answer.

4.71%

That is the average annual return from investing in the MCSI China index since March 31 1998. This despite 40% average annual returns in the past five years.

I use this startlingly data point to make a much larger point. Sometimes large economic trends do not make great investments. And obvious top down trends don’t always make good investments.

Investing in foreign countries is a risky and volatile enterprise and often the long term returns do not compensate you for the variety of risks that you run by investing in these markets. Further, there are a variety of issues to consider including accounting standards, currency issues, regulatory and tax concerns and that’s not to mention the individual company risks as well.

I believe China faces some serious headwinds going forward. Everyone seems to think China can spend anything it wants on commodities such as oil, iron ore, copper, etc., but they don’t. And when you add in the fact that China is about to start importing vast amounts of food as well and that they have a problem with water and one realizes that the country has serious import problems to overcome. And this doesn’t even take into account, the lack of accounting standards, mounting banking problems, a surging gap between between rural and urban Chinese and a lack of clear private property laws.

So before commentators and so-called experts try to convince you to invest in something hot like China consider the longer term record of investing in the country and look deeper into some of the issues affecting the country, you might be surprised by what you learn.

For the record, I have no investments in China or any company listed anywhere that has major operations in China. For reasons cite above, I believe there are better risk/reward situations elsewhere, especially in North America.