by Jim Woods | September 14, 2012 8:31 am
The recent news that the Chinese government will undertake a massive stimulus package estimated at $158 billion-plus is, as you might expect, a development with implications for that country’s economy — and for investors looking to profit from the circumstance.
Speaking at the World Economic Forum in Tianjin, Chinese Premier Wen Jiabao said his country’s budget surplus of around 1 trillion yuan (roughly $158 billion) is something that China “will not hesitate to use for the fine tuning of the economy.”
Fine-tuning of the economy here translates into the country’s plans to build 1,254 miles of roads, nine new sewage-treatment plants, five port improvement projects and two waterway system enhancements. According to the National Development and Reform Commission, the plan also includes approvals for 25 new subway projects.
The move by Beijing policymakers is clearly intended to boost the nation’s slowing GDP growth rate, a metric that now is estimated to grow less than 8% for the full year.
Already, however, many China skeptics are claiming this new infrastructure buildup won’t have a major effect on the nation’s GDP. And according to Citigroup analyst Scarlett Chen, the impact of any stimulus is going to be relatively small. In a note to clients, Chen wrote, “We think the market is getting too excited about National Development and Reform Commission’s latest approval of infrastructure projects.”
While I suspect that Ms. Chen might indeed be proven right when it comes to the effect this planned infrastructure buildup has on GDP over the long term, one thing that cannot be denied: Companies will benefit from new demand for the basic materials consumed in such sizable infrastructure buildups.
The question here for investors is “Which companies are best positioned to ride this China infrastructure buildup wave?”
One group of companies to look at is diversified providers of the raw materials used in massive construction projects. Materials such as copper, iron ore, coal and aluminum all are the building blocks for an infrastructure build-out of China-sized proportions, and as such investors should stick with a few of the star companies in the space.
Copper — and the mining stocks responsible for extracting the metal — tops my list of ways to play the China infrastructure buildup, as copper is the industrial metal used in virtually every major infrastructure project. The ubiquity of copper is why traders call it the commodity with a master’s degree in global economics. When copper prices break out, which they have in recent weeks, it’s considered a leading indicator of global economic activity.
Click to Enlarge If you want to play the breakout in copper, one easy way is via the iPath DJ-UBS Copper Total Return ETN (NYSE:JJC), an exchange-traded note that mirrors the spot price of copper. As you can see by the chart of JJC, there has been a strong move higher in the commodity since August, with the spot price of copper surging above both the short-term, 50-day moving average, and the long-term, 200-day moving average.
As for companies that mine copper, one of the leading players in the space is Freeport-McMoRan Copper & Gold (NYSE:FCX). Similar to copper’s spot price; we’ve seen a strong move higher in FCX shares since August that also has taken prices back above ke technical levels.
Another strong mining and materials stock positioned to profit from a China build out is BHP Billiton (NYSE:BHP). The company supplies a wide variety of materials, not just copper. The aluminum, iron ore, metallurgic coal and various industrial materials sold by BHP makes this company a virtual general store for infrastructure buildups.
In addition to copper and mining stocks, steel and construction equipment firms stand to gain from all of these massive, earth-moving projects. Korean steel manufacturer POSCO (NYSE:PKX) is a firm well positioned to profit from the build-out, as it has been a big supplier of steel to China over the years.
As for construction equipment, here industry stalwart Caterpillar (NYSE:CAT) is the go-to firm. The U.S.-based heavy machinery giant is the world’s biggest supplier of earth-altering machines, and with more than 1,200 miles of roads to build, there’s going to be an enhanced need for Cat tractors that transform the landscape from dirt to asphalt.
If you’re looking to ride the latest China infrastructure wave, these five securities are among the best ways to do so.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.
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