Archive for May, 2008

As I’ve told you before, I believe the #1 rule for making money in the next decade is to get long whatever the Chinese are buying.

After all, China will need to consume an unprecedented amount of natural resources to fuel its red-hot economy and feed its 1.4 billion people. And in a moment, I’m going to give you four specific areas to target, and the company in each area that looks most like a takeover candidate.

But first, I want to tell you about …

Four Recent Chinese Deals
That Prove My Point!

In just the last week, we witnessed a flurry of deals that prove just how hungry China is for natural resources.

Deal #1: The State Administration of Foreign Exchange (SAFE), which manages China’s $1.4 trillion foreign exchange reserves, bought a 1.6% stake worth $2.8 billion in French oil firm Total and 1% of British Petroleum for $2 billion.

Deal #2: Baoshan Iron and Steel is expected to buy a 9% stake in Australian miner BHP Billiton. And it’s worth noting that Aluminum Corp of China, also known as Chalco, partnered with Alcoa to buy a 9% stake in BHP rival Rio Tinto earlier this year.

Baoshan Iron and Steel is China's flagship, state-of-the-art steel producer.
Baoshan Iron and Steel is China’s flagship, state-of-the-art steel producer.

Deal #3: Chinese Iron and Steel Group is going to increase its stake in Australian prospector Apollo Minerals to 19.9%.

Deal #4: Sinosteel of China bought a 2.4% interest in Murchison Metals and offered $954 million for the Midwest shares it does not own.

Even more telling perhaps, are the deals that did NOT happen:

First, Steelmaker Shougang’s attempt to buy 19.7% of Australian miner Mount Gibson Iron was blocked after running into strong opposition from Australian regulators.

Second, China National Petroleum Corporation (Petro China) tried to purchase a $20-billion stake in Spanish oil company Repsol but was rejected.

So there’s no doubt in my mind that China is on a buying spree. And I’m not just talking about oil, either. Fact is …

The Chinese Have a Ravenous Appetite
For Virtually ALL Commodities!

While I don’t have any inside knowledge about what companies the Chinese have in their sights, I do know what industries are strategically important to their lofty growth objectives.

Energy: Do you remember China Petroleum’s failed takeover attempt of Unocal in 2006? China needs energy — and lots of it — so you can expect frenzied buying activity to lock up reliable supplies of multiple sources of energy. In my book, oil, natural gas, coal, and uranium are all key players.

My #1 pick for an energy takeover: Cameco (NYSE:CCJ), the largest uranium producer in the world.

Base Metals: After fuel, the next thing China needs the most are the basic minerals and metals to build things like roads, bridges, skyscrapers, dams, ports, and power plants. That means that China will need all the aluminum, copper, iron, potash, bauxite, zinc, tin, and cement it can get its hands on.

My #1 pick for a base metals takeover: Companhia Value (NYSE:RIO), which is a diversified Brazilian mining company and the largest producer of iron ore and nickel in the world.

With 1.4 billion people to feed, China has stopped exporting rice.
With 1.4 billion people to feed, China has stopped exporting rice.

Food: Rice shortages have been plastered all over the news recently and while rice is a crucial staple of the Chinese diet, they also need pork, wheat, soybeans, poultry, edible oils, dairy, and seafood.

My #1 pick for a food takeover is Sadia S.A. (NYSE:SDA), a Brazilian food company that specializes in poultry and pork — two of China’s favorite protein sources.

Water: I can see the day when one of the most valuable commodities in the world will be water. One-third of China’s rural population — an estimated 360 million people — does not have access to safe drinking water because more than 70% of China’s rivers and lakes are polluted. Some of China’s rivers are black like soy sauce from industrial effluent and untreated sewage!

My #1 pick for a water takeover is China Water Affair, a Hong Kong-based sewage treatment and water supplier that operates in a handful of Chinese provinces.

And while there’s no “sure thing” in the financial markets, I can say with confidence that the Chinese will be very aggressive buyers in these sectors.

So, Here’s What I Suggest For Most Investors

While I think the four companies I just mentioned are attractive takeover candidates, you might also consider focusing on sector exchange traded funds (ETFs) that zero in on these key industries. Here are four ETFs that target each of the above sectors.

1.) Energy: Energy Select Sector SPDR (XLE)

2.) Base Metals: PowerShares DB Base Metals (DBB)

3.) Food: PowerShares Dynamic Food & Beverage (PBJ)

4.) Water: Claymore S&P Global Water Index (CGW)

I should also mention that the Chinese are buying lots of other things, too. They’re buying homes, cars, electronics, clothes, cell phones, English lessons, gambling vacations, and video games. For that reason, I think these areas present spectacular investment opportunities as well.

While you can’t throw a dart at Chinese stocks and be successful, there is zero doubt in my mind that China deserves a special and significant place in your portfolio.

Why? Because we’ve only seen the tip of the great Chinese stock market boom!

Heck, Jusatin Lin Yifu, the chief economist of the World Bank and head of Peking University’s China Center for Economic Research, forecasts that the Chinese economy will be 2.5 times as large as the U.S. by 2030.

“I believe China’s economic momentum is very likely to maintain a similar growth rate of the past 25 years, at about 8%,said Yifu.

Growth of 8% a year until 2030? If Yifu is even remotely close to being right, China will be the investment of the century!

Best wishes,

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