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Play China From the Outside: Simon Baker

Fin - Breakout - US

If ''seeing is believing" then it's probably safe to say that if you don't like what you see, you're probably not going to be a believer. Such is the case with Simon Baker, founder of Baker Ave Asset Management and Friend of Breakout, who has just returned from an eye-opening 10-day trip to the Middle Kingdom that left him a changed man. Changed in that when he got home he — and his entire eight-man entourage of hedge-fund managers — sold all of their Chinese stocks. Whether you agree with his analysis or not, you have to acknowledge that it's a bold reversal on a country that is at the heart of the global growth story.

Baker says he's not entirely abandoning the long term China growth story but is instead looking at different ways to play it. First and foremost he says he's avoiding any direct investments into China, as well as into any of the many Chinese ETFs or IPOs.

For him, the way to play it is via U.S. multinationals that offer Western-style accounting, management and transparency, yet still have exposure to the world's second-largest and fast-growing economy. Yum Brands (YUM) is one example. Perhaps it was a craving for comfort food or familiarity while traveling abroad, but our Anglo-American guest is bullish on chicken, pointing out that KFC is the dominant fast-food chain in China and also the driver of profit growth.

Wynn Resorts (WYNN) is another stock that Baker says is worth owning, with 60% of its sales now coming from Macau.

In both these cases — and more broadly — Baker says it's not time to blindly plow money into the market, fearing that further short-term consolidation is ahead. He may not be the first person voicing skepticism over China but he joins a growing and increasingly vocal group of critics who see the Shanghai Composite's recent declines as the start of something much bigger.