Three Ways to Play China

11/17/2015 10:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

The main challenge for China remains the deflationary trend; relatively weak sales growth among corporations headquartered in the US and Europe underscores this headwind, explains Yiannis Mostrous, editor of Capitalist Times.

Anemic economic growth suggests that the deflationary environment could persist for some time, even though monetary policies remain accommodative in many economies. Unemployment levels have declined, but wage growth remains constrained.

Although a deflationary environment may cause problems for economic policymakers and corporations, this situation doesn’t necessarily spell doom for the stock market because the major central banks can continue their accommodative monetary policies for a longer period.

Meanwhile, there are some indications that economic activity in China has stabilized, with the service sector doing most of the heavy lifting. And industrial activity has also showed signs of improvement. Further government support for infrastructure development could help to boost this part of the economy.

But investors shouldn’t confuse these signs of stability with an improvement in economic growth. The most important factor for China’s macroeconomic outlook remains the extent to which the service sector and domestic consumption will suffer after 3.5 years of deflation in producer prices.

Investors with a longer time horizon and a stomach for volatility should focus on sectors that boast robust structural growth stories. Financial stocks and the telecom sector remain two of our favorites, though some braver investors may want to wade into the technology space.

China’s financial institutions stand to benefit from growing household incomes and demand for banking, insurance, and investment products. Bank stocks stand out for their undemanding valuations, though shares of insurers and real estate companies also look attractive.

US-based investors can gain exposure to this trend via Global X China Financials (CHIX), an ETF that offers diversified exposure to China’s financial sector. Buy up to $20 per share.

After taking a 32% profit on China Unicom (CHU) at the end of April, we’ve shifted our allegiance to rival telecom China Mobile (CHL), which added 1.37 million new wireless accounts in August and grew its base of customers with 4G-enabled devices to 20.45 million.

The telecom giant also reported first-half results that exceeded analysts’ expectations and management continues to weigh an increase to the targeted dividend payout ratio.

Such a move would align with the government’s push for companies that generate significant amounts of cash flow to raise their dividends. With a dividend yield of 3.2%, China Mobile’s American depositary receipt rates a buy up to $63.

As for the technology sector, intrepid investors should consider Global X NASDAQ China Technology (QQQC), which provides exposure to the NASDAQ OMX China Technology Index. The fund rates a buy up to $25 per share for aggressive investors.

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