By Jeff Reeves, MarketWatch
There are plenty of reasons for investors to freak out when they see the word “China” in a headline.
Amid the simmering trade war, which has seemed to benefit nobody other than import/export consultants , the looming holiday shopping season presents problems over how manufacturers and consumers could be hurt.
And to make matters worse, remarks from President Trump about limiting investment in the region or even delisting Chinese stocks altogether has sparked uncertainty into how to manage exposure to the region.
But investors should take a deep breath before they buy into the panic. Just as the doom-and-gloom crowd hasn’t managed to sink the U.S. stock market yet in 2019, with the S&P 500 Index /zigman2/quotes/210599714/realtime SPX -0.72% still sitting on a year-to-date return of about 15% through Thursday’s closing bell, neither have the bears been able to gain traction in China. In fact, the Shanghai Composite /zigman2/quotes/210598127/delayed CN:SHCOMP -0.0035% has actually slightly outperformed the S&P 500 this year.
There are always risks in every investment, and you won’t find a single region in the world where all the analysts are bullish. But in many ways, the negativity around China may be setting up investors for a nice relief rally if and when the gloomy trade environment clears.
If you’re afraid of China, here are five big reasons to reconsider — and a bunch of trading ideas to gain exposure to the region:
The case for China
Aside from day-to-day gyrations based on tweets, commodity prices or economic reports, there are a few bigger points worth making about investments in China:
You can’t avoid it: China’s national economy is the second largest on the planet, behind only the United States. But perhaps more importantly, its national stock market is also No. 2 behind the U.S. when measured by market capitalization. Beyond names most investors are familiar with, including massive state-run energy firm Sinopec /zigman2/quotes/208385578/composite SHI -2.24% , there are also a host of smaller firms that are among the 1,500 or so “A shares” listed on the Shanghai stock exchange, and another 1,400 stocks listed onshore on the Shenzhen exchange. That means blanket statements like “China stocks are too risky” are actually more like saying “the stock market is too risky.” If you think that way, be my guest and attempt to time the market or hide out in an all-cash portfolio. But if you believe in diversified investing for the long term, then China must be part of your portfolio.
Still growing: Yes, in 2019 China GDP growth will likely hit the lowest level in nearly three decades. But let’s remember that growth rate is still forecast to be 6% to 6.5%, comfortably double that of the U.S. and multiples of other economies including Japan’s. As an investor, it is proper to worry about recent trends and near-future expectations. But just as quibbling over what kind multiple is “fair” for a tech stock sometimes can overshadow the long-term growth story, it’s important to remember that the underlying fundamentals here.
Opening up: China is only getting bigger, too. Recent trade challenges with the U.S. aside, it’s important to keep in mind the general opening of China’s economy over the past several years. Consider a big change to ownership restrictions in the financial sector, announced this summer in the thick of tariff talks, which is set to take effect in 2020, a year earlier than previously planned. Also this summer, a highly anticipated stock connection between London and Shanghai created a direct link to Western investors in place of previous efforts routed through Hong Kong.
Benchmarks adding China: On a related topic, this opening up means that structural challenges limiting institutional investors are falling away. For instance, in 2018 it was announced that the Bloomberg Barclays Global Aggregate Index would start to phase in Chinese debt across the next few years. And in regards to equities, leading stock index provider MSCI added more than 230 mainland China stocks to a flagship emerging market benchmark.
(Relative) political certainty: Perhaps the most ironic of all arguments for China investing is that investors may have the most visibility into the politics and policies of this region next year vs. any other major market in the world. The U.K. was already a bit of a mess thanks to Brexit drama, but is even more uncertain after the recent antics of Boris Johnson. And as a result, the European Union’s relationship with the rest of the world has been thrown in to question, even as EU politics have been disrupted by a major European Parliament election in May that brought in new leadership as part of a new five-year legislative cycle. And let’s not even talk about impeachment and what the 2020 U.S. election holds. If you’re looking for political stability and a long-term vision, China’s tradition of crafting “five-year plans” for its economy is a breath of fresh air.
What’s the China trade?
If you want broad China exposure, unsurprisingly there are a bunch of ETFs for that. The iShares China Large-Cap ETF /zigman2/quotes/208670743/composite FXI -0.06% is the largest by assets, with some $4.7 billion under management, and provides easy access to 50 of the largest publicly traded corporations in China. IShares also has the No. 2 fund via the iShares MSCI China ETF /zigman2/quotes/206267952/composite MCHI -0.21% , a 43.6 billion fund with a deeper bench of roughly 470 China corporations. These are the most obvious and liquid options, but certainly not the only ones.
For those particularly bullish on Chinese technology stocks as the economy transitions away from its old manufacturing dominance and into a digital age, the KraneShares CSI China Internet ETF /zigman2/quotes/205873167/composite KWEB -0.80% is worth a look. Though not sponsored by a big ETF shop, the KraneShares fund is definitely legitimate with more than a million shares traded daily and nearly $1.5 billion in total assets. Holdings for this fund are focused, with a list of only about 40 stocks, but the lineup avoids the sprawling state-run financial and energy stocks that can be big parts of other ETFs in this region.
If you’re a stock-picker, then conversation about China is less about general opportunities and sentiment and more about individual companies with a uniquely bullish outlook. And just like Big Tech in the U.S., China’s technology giants including Alibaba Group Holdings /zigman2/quotes/201948298/composite BABA +0.20% and Tencent Holdings /zigman2/quotes/207908563/composite TCEHY +1.79% are worth your attention because of their scale and entrenched operations in fast-growing areas including cloud computing and e-commerce.
If you worry about chasing growth in the region, however, there are still plenty of value-oriented plays in China that are looking increasingly attractive. Take telecom behemoth China Mobile Limited , which boasts a staggering 925 million wireless customers, more than double the entire population of the United States. It has a forward price-to-earnings ratio of about 10, compared with U.S. telecom giant Verizon’s /zigman2/quotes/204980236/composite VZ +0.60% 12. Throw in CHL’s 4.7% dividend yield, which tops the 4.2% offered by Verizon, and income investors may want to consider this China telecom over domestic options.
And while not as obvious, it’s important to note that growing interconnectedness means that China plays don’t have to be headquartered in the nation. Case in point: Aerospace giant Boeing /zigman2/quotes/208579720/composite BA -2.66% , which is incredibly dependent on Chinese aircraft sales and books more than 13% of total revenue in the region.
Or better yet, look at Apple /zigman2/quotes/202934861/composite AAPL -1.37% , which booked 17% of total revenue in Greater China last quarter. Obviously how these companies manage their strategy matters just as much as mere exposure to the region. However, they also illustrate how major U.S. stocks may in fact be indirect ways to capitalize on China.
Jeff Reeves is a MarketWatch columnist.