Why Warren Buffett’s Wearing Chinese-made Suits

by George Leong, B.Comm.

In my previous column, I talked about the situation in China and how the country is a top source of growth opportunities.

In fact, China is even becoming an area of interest for investment guru Warren Buffett. He is an investor in a maker of suits in China; in fact, says he that has gotten rid of his old suits and now wears the Chinese-made suits.

His growing interest in China is clearly not what we saw just a few years ago. Buffett’s Berkshire Hathaway unit made an astounding $1.0 billion in paper profits from the company’s investment in Chinese automaker BYD and this is only since September 2008. That’s pretty darn good. BYD has become the seventh-largest Chinese carmaker and the hope is that it will also increase the company’s exposure outside of China. In fact, we fully expect to begin to see Chinese-made vehicles in the U.S. in the sub-$10,000 bracket. And if the Chinese automakers do as well in the U.S. as the Japanese and Koreans, it will be tougher for the domestic automakers. Maybe that is why General Motors Corp. is investing heavily in China and is reporting stellar growth in the Chinese market, something it could not do at home.

The signs of economic renewal are improving globally. In China, foreign direct investment (FDI) increased for the first time in a year in August. Yet, despite the rise in August, the data continue to point to weakness. In the period from January to August, FDI in China fell 18% year-over-year, according to the Ministry of Commerce. Keep in mind that it is only one month and we want to see a trend develop. Premier Wen Jiabao suggested that the country continues to be unstable and full of risk.

The Asian Development Bank increased its GDP estimate for China to rise by 8.2% in 2009 and 8.9% in 2010. The National Bureau of Statistics predicts that China will grow its GDP by eight in 2009.

As far as the stock market, following the 20% market correction in the benchmark Shanghai Composite Index (SCI), the index had broken back above 3,000, but it has failed to hold. The SCI is still up about 56% in 2009, well above the returns in the U.S. markets, but there is still some concern about another downside move.

The risk with Chinese stocks is that the group is extremely vulnerable to mass selling, especially given that the SCI is up 56% this year. We appear to be seeing some calm return. On the chart, the SCI has rallied back above its 20-day moving average at 2,908 and is sitting just below its 50-day moving average of 3,084. The index appears to have found a bottom.

There is no need to join in and sell. You should have stops and take profits along the way during the run-up this year. The keys with Chinese stocks are patience and careful monitoring. Make sure your portfolio is well-diversified across market-caps, industries, and countries.