What's On China's Shopping List?

Published in Investing on 12 June 2012

Chinese investment into Europe is set to take off.

One man's crisis is another man's opportunity. After the 2008 financial crisis, RIT Capital Partners (LSE: RCP) was one of a number of financial investors that announced an agenda to acquire distressed assets. And plenty of real-estate investors have been picking up bargains in the sector as the lending banks have been shedding property assets taken onto their books.

Now it seems it's the turn of the Chinese to take advantage of Europe's turmoil. According to a report from Rhodium Group, Chinese direct investment into Europe is booming. Annual inflows, combining acquisitions and greenfield investment tripled from 2006 to 2009, and tripled again by $2011 to $10 billion.

Rhodium forecasts that there will be $1-2 trillion of Chinese direct investment into Europe between 2010 and 2020. It's part of a long-term shift of global wealth eastwards. While in the past, rich Western companies established operations in China to take advantage of new markets, that wealth is set to flow back as Chinese companies invest in Europe and the US. The Chinese government expects outflows of direct investment to match inflow by 2015.

Profit, not politics

Although about 70% by value of acquisitions have been made by Chinese state-owned companies, many more smaller investments have been made by private firms -- about two thirds by number of deals. It seems that profit as much as politics is the driver behind the international outlook of Chinese companies. But the government is encouraging this outward flow of funds, in part to diversify China's massive foreign exchange reserves.

The trend is set to shake up the investment landscape. Western companies that have based their growth strategies on exploiting the developing markets of China and the East will find tougher competition from Chinese companies that move into their own back yard.

At the same time, the prospect of acquisitions from this new part of the world should pep up M&A interest in a number of sectors.

While hitherto Western companies have outsourced the low-margin manufacturing part of their operations to China, Rhodium believes that Chinese companies will increasingly wish to access higher-margin activities such as brand ownership, technological design and distribution.

Sectors

The pioneers of Chinese outward investment have been oil and gas and natural resources companies. State-owned companies in these sectors have invested in foreign upstream assets to diversify supply risk and strengthen global bargaining power.

But the new investors come from a wide range of sectors, with manufacturing prominent. Typical examples are Chinese computer manufacturer Lenovo's $900m acquisition of German Medion in 2011, which boosted its distribution channels in Europe's largest PC market, and wind turbine manufacturer Goldwind's acquisition of Germany's Vensys, giving it the latter's technology. Rumours that Goldwind might bid for troubled Danish Vestas pushed Vestas' shares up 12% briefly in April.

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UK

How will this affect the UK? As Chinese investment accelerates, we're sure to see companies -- both private and public -- falling into Chinese ownership. Most attractive are likely to be companies in sectors in which the UK enjoys a comparative advantage. Those include financial services, high-tech manufacturing, electronics and engineering, and fashion.

It has been a feature of the UK engineering sector for companies to outsource manufacturing to low-cost countries such as China while retaining the high-value added design and marketing functions in the UK. The sector has done very well from this strategy; Spectris (LSE: SXS) and Spirax-Sarco (LSE: SPX) are fine examples -- and would seem to be just the sort of companies that fit Rhodium's template for Chinese interest.

The higher-tech aerospace and defence sector may enjoy immunity. Sensitivities over military and commercial secrets in this sector, particularly of companies such as Senior (LSE: SNR), Ultra (LSE: ULE) and Meggitt (LSE: MGGT), which are part of large US programmes, may prohibit Chinese investment.

Fashion

The high-end fashion market is another sector that has boomed on the back of Chinese demand, with companies such as Burberry (LSE: BRBY) and Mulberry (LSE: MUL) growing exponentially as a result. It would be ironic, but perhaps not surprising, if brands such as these were to be acquired by Chinese companies or entrepreneurs.

In that context, Europe's economic crisis will only serve to accelerate the eastward shift of wealth and ownership of assets. It's a trend that will increasingly dominate investment thinking.

Finally, if you're interested in building wealth from blue-chip shares -- so often dealing in markets outside of the UK, too -- then you must download a copy of Top Sectors For 2012, The Motley Fool's latest free guide for intelligent investors. It picks out three sexy sectors to help to boost your investment returns, so download your copy now!

Further investment opportunities:

> Tony has shares in RIT Capital Partners and Senior, but no other shares in this report.

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