A year ago, there was talk about how a crashing economy and a trade war was going to tear apart China and spill into the West.
But so far in 2019, Chinese stocks have been as good as high-flying U.S. investments. Case in point: The iShares China Large-Cap ETF FXI, -0.53% the largest China-focused exchange traded fund with more than $6 billion under management, is up 15% since Jan. 1 to slightly outperform the S&P 500 Index’s SPX, +0.00% returns.
Chinese stocks are looking to build on this success over the past few months, too, on the heels of recent data that showed the nation’s manufacturing sector expanded at the fastest rate in eight months.
Of course, things are certainly not all coming up roses for China in 2019. An updated gross domestic product (GDP) forecast pegs the nation’s expansion at 6% to 6.5% this year, which, while comparatively brisk versus Western economies, will mark the third straight annual slowdown. All indicators show China’s economy faces serious structural issues as it settles into a new era of slower growth compared with double-digit GDP expansion a decade or so ago, and persistent fears of a credit crunch continue to linger.
Still, these pressures have been evident for a long time and are hardly unexpected. Shanghai’s SSE Composite SHCOMP, +1.24% is still down roughly 40% from its mid-2015 peak, compared with gains of about 40% for the S&P 500 in the same period, so slower growth has clearly been acknowledged by investors. Furthermore, China’s challenges could motivate policy makers to seek out a solution on trade agreements sooner rather than risk a prolonged trade war with the U.S. In fact, across March there was increased chatter about the U.S. and China closing in on a trade deal that would remove barriers to businesses on both sides.
If you want to dabble in Chinese investments either to tap into growth opportunities or simply for geographic diversification, here are a few to consider:
China Mobile
The largest mobile-telecom provider on the planet by subscribers, China Mobile Ltd. CHL, +0.16% boasts some 900 million subscribers. While it admittedly makes significantly less revenue per customer than U.S. telecom giants like AT&T T, -1.00% anyone who believes in the growth narrative of Silicon Valley where scale and future potential matters more than current profit margins should sit up and take notice at the massive reach of this China stock.
There is ostensibly competition, which weighed on China Mobile’s most recent earnings report in March, but as a state-backed enterprise there is a firm floor on the pain CHL is likely to suffer. Furthermore, earnings reports in 2018 were characterized by expanding margins as the company continues to evolve and grow even as most markets in China are already at a level of cell-phone saturation as in the West.
While some China stocks have been volatile, CHL has actually plodded steadily higher to match the roughly 10% gain for the S&P 500 in the past 12 months. The stock also trades at just under 12 times earnings, and pays a yield of 4.1%. If you’re leery of overvalued stocks in China after this run, there’s stability in China Mobile that could make it a great fit even for less aggressive investors.
Huya
If you like your stock picks a bit spicier, then consider mid-cap stock Huya Inc. HUYA, -5.46% which provides a video-game platform in Asia that broadcasts content, similar to Amazon.com AMZN, -0.01% property Twitch in the West.
Before you pooh-pooh video games, let alone streaming videos of gamers playing their favorite titles, consider that Amazon acquired Twitch for almost $1 billion in 2014. And this year, some experts expect e-sports to become a billion-dollar annual industry in its own right. The potential is real here, and in many ways has already arrived.
Back to Huya, the company provides a streaming platform in the emerging industry that continues to grow at tremendous rates. According to fourth-quarter earnings, revenue jumped more than 110% in 2018 over 2017, and forecasts are for another 50% in top-line expansion this fiscal year. Users grew nearly 35% year-over-year in 2018 to about 116 million active users with almost half of those on mobile. And as the icing on the cake, the company is a bit above break-even as it invests heavily in expansion.
There is growth in streaming, but Huya is also investing big time into tournament-style competitions both to create content and cement its brand. Video games are a way of life just about everywhere these days, but in a region like China that skews a bit younger, this is a great business to be in. No wonder shares have soared roughly 80% since trading at around $16 a share immediately after their 2018 IPO.
iQiyi
Another growth-oriented China stock is iQiyi Inc. IQ, -1.57% which is sometimes billed as the Chinese Netflix Inc. NFLX, +0.21% since it specializes in streaming video. Shares have been mighty volatile after its spinoff from China search giant Baidu Inc. BIDU, +0.34% in early 2018, with IQ’s stock surging 150% by summer only to give it all back by year-end amid the gloom and doom surrounding the stock market in December. However, IQ has come roaring back lately and momentum is decidedly to the upside once more.
For starters, it’s important to understand that there are hard numbers behind iQiyi and not just fluffy narrative about streaming growth in China. In 2018, revenue expanded 55% as the company added nearly 37 million new paying subscribers.
These are the kind of jaw-dropping numbers that caused investors to first fall in love with Netflix, and IQ’s stock seems to be recreating the growth path nicely. iQiyi is also developing video games and marketing tie-ins with its shows, including a recent partnership with DreamWorks animation on a mobile game tied to “The Croods” that is at the front of the pack among top-grossing games in China this year for both Android and iOS devices.
The icing on the cake is that a strong core streaming business will create a reliable platform for future growth. As we’ve seen time and again, subscribers tend to stick around for the long term when they latch on to a strong first-mover like IQ. U.S. investors should consider hanging on for the ride in this fast-growing China stock, too.
Tencent
If you like any and all of these flavors, then the simplest Chinese stock to buy is tech conglomerate Tencent Holdings TCEHY, -0.64% Its WeChat property is a social-media powerhouse with over 1 billion global users; it is one of the biggest video-game companies in the world with stakes in firms that include Fortnite producer Epic Games; it owns a decent stake in Asia e-commerce portal JD.com Inc. JD, -3.10% ; and boasts plenty of other connections that are sure to appeal to tech investors.
There’s a lot to like at Tencent. But personally, I think the big growth in mobile payments holds the largest long-term upside for Tencent shareholders. Integration with WeChat has allowed Tencent to go toe-to-toe with competitors in the fast-growing marketplace for cashless transactions in Asia, and in its fourth-quarter report noted that overall revenue expanded at a brisk 28% rate year-over-year, its “other services” arm that includes mobile payments as well as cloud computing saw a stunning 72% growth rate to top even its online advertising unit.
The U.S. model of tech conglomerates like Alphabet GOOG, +0.51% GOOGL, +0.55% and Amazon is being recreated in China, with the nearly $450 billion Tencent as the prime example. As with Silicon Valley’s iconic names there is bound to be some volatility, and in fact Tencent is still down from its 2018 highs, but shares are up roughly 250% in the past five years to prove the long-term trend is decidedly upwards thanks to its scale and diversification across all elements of the tech marketplace.
iShares MSCI China A ETF
Of course, if you’re looking to branch out beyond a specific stock or industry, there are a host of China ETFs that offer even more diversification than this conglomerate. However, it’s important to acknowledge that most of the popular funds tend to be extremely top-heavy and focused on mega-stocks in the region. Case in point: The iShares China Large-Cap ETF has roughly 37% of its entire portfolio in its top four positions that include aforementioned tech giant Tencent and three big financials that include China Construction Bank. And while other, smaller funds offer diversification, they sometimes are not pure plays on the region with a smattering of multinationals listed in Singapore or Hong Kong.
If you’re looking for diversification but still demand a clear focus on China, then, you have to shop around. And near the top of your list should be the iShares MSCI China A ETF CNYA, -0.57%
Though smaller than the big boys, CNYA offers a true “country view” on China via domestic A shares rather than broad regional exposure. It also isn’t overly reliant on a few positions, with no single investment accounting for more than 5% of the total portfolio at present. And best of all, it has a hefty tally of consumer staples and traditional industrial stocks in addition to the typical focus on financials.
If you want to invest in the true potential of China as a whole and avoid over-reliance on a single name, then CNYA is a good one-stop shop. And at an annual expense ratio of 0.65%, or roughly $65 on every $10,000 invested, you can get a piece of more than 200 companies that aren’t readily accessible to the typical Western trader.
Jeff Reeves writes about investing for MarketWatch.
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