A cheap back-door play on China

We’ve written a good bit recently on how we aren’t much interested in buying into Chinese stocks at current levels. We’re not convinced by the 10%-a-year-for-ever growth story. And even if we were, we wouldn’t be prepared to pay the overly high prices being asked in today’s equity markets.

But what if we were convinced – as so many are – by the long-term growth story? What would we buy then? Regular readers will not be remotely surprised to see that the answer is Japan.

A note from Jonathan Allum at KBC explains why: Japan, says Allum, is now very clearly “decoupling from the US and Europe and hitching itself to the Asian express.” 

Look at the recently-released January trade numbers and you see that imports were up 8.2% month-on-month, and exports up 8.6%, putting the seasonally-adjusted trade surplus at a two-year high.

Looking to the regional breakdown of this shows that exports to Asia are up 68% year-on-year and exports to China up nearly 80%. Overall, more than 55% of Japan’s exports go to Asia. A mere 16% of them go to the economic train wreck that is North America.

There are two important points here. The first, as Allum says, is that exports are clearly correlated to industrial production, so perhaps the very low consensus forecasts for that in Japan could do with an upgrade.

And the second? That if you want to invest in China but you don’t want to pay a premium for doing so, why not invest in one of the best and cheapest China plays there is – Japan?