Earlier this year, the stock market took a tumble in part on worries about slowing growth in China, the world’s second largest economy and a key driver in global economic expansion.
The Standard & Poor’s 500 index is nearly even for the year, bouncing back nicely from a February loss of 10 percent. But worries about China remain, creating a possible inflection point for investors who are both wary but also wanting to invest in what is still a huge portion of the global economy.
Uncertainty is heightened as China attempts to transition its economy from dependence on domestic stimulus and infrastructure build out to a model reliant on domestic consumers and urbanization, says Katrina Lamb, head of investment strategy and research for asset management firm MV Financial.
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There may still be a good growth story, Lamb says, but also the heightened risk of playing it wrong as the transition may not go the way China’s leaders expect. “It’s a very tricky time,” she says.
While government stimulus may help in the short term, Atul Lele, chief investment officer with banking and investment management company Deltec International Group, doesn’t see opportunities in the Chinese market over the next two to five years. He has a negative opinion on Chinese equities and companies exposed to the Chinese economy and recommends selling commodities producers that sell to Beijing, such as mining companies.
Chris Bertelsen, chief investment officer at investment advisor Global Financial Private Capital, is more optimistic. He thinks worries on China’s growth are short term and the nation will continue to grow over the next five years.
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A slowdown in China was inevitable, he says, as the nation’s growing middle class meant it couldn’t forever be a low-wage and low-cost producer. He thinks China will be able to transition to a U.S.-type consumption model within a decade.
Despite the risks, China remains a big part of the world economy and it makes sense for investors to include it in their portfolios, Lamb says.
Lamb recommends companies that have exposure to China but are also diversified elsewhere, such as:
Walt Disney Co. (ticker: DIS). The media and entertainment behemoth is planning to open its first mainland China theme park in Shanghai in June as a joint venture with Shanghai Shendi Group. The $5.5 billion park will draw 11.5 million people in its first year and 34 million annually when it’s fully operational, the South China Morning Post reported, citing an analyst report from investment bank China International Capital Corp. The stock is down 6 percent over the past year.
Nike (NKE). In its most recent fiscal quarter, the sports clothing and gear company grew its footwear, apparel and equipment sales in China by a combined 23 percent to $982 million, contributing $358 million in earnings before interest and taxes. That’s 28 percent of total Nike brand earnings before interest and taxes of $1.277 billion. The stock is up 23 percent over the past year.
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Starbucks Corp. (SBUX). China is the coffee giant’s second-largest and fastest-growing market, the company said in January, when it said it opened its 2,000th store in the nation. “Over time, it’s conceivable that China could become our largest market,” CEO Howard Schultz said at the time. The company is hoping to operate 3,400 stores in China by 2019. The stock is up 26 percent over the past year.
With this strategy, even if China’s transition doesn’t pan out as hoped, these companies have diversification elsewhere to cushion them, Lamb says.
Gaining exposure through Chinese companies such as Baidu (BIDU) and Alibaba Group Holding (BABA) that are traded on U.S. exchanges could also be profitable, she says. But Lamb says that strategy is riskier because it succeeds or fails based on the Chinese consumer.
For Bertelsen, the best way to play China’s economic transition is through four of its Internet companies because they are on the front lines of its shift to a consumer-based economy.
JD.com (JD). Bertelsen compares this online direct sales company to Amazon.com (AMZN). In addition to selling electronics, appliances and general merchandise, it also enables third-party vendors to sell products on its website. The stock is down 10 percent over the last year.
Tencent Holdings. This company provides Internet and mobile, advertising and e-commerce transaction services in China. The stock is up 8 percent over the past year.
Baidu. Bertelsen calls this Chinese-language Internet search provider “Googleish.” It also is involved in online marketing services. The stock is down 8 percent over the past year.
Alibaba. While there is some duplication with JD.com, Bertelsen says this online and mobile commerce company is a good name to own because of its global reach. Its shares are down 4 percent over the past year.
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How to Invest in China’s Changing Economy originally appeared on usnews.com
