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5 China Stocks to Buy as Red Dragon Outshines Asia

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China’s stocks are making a blistering comeback this year after a dismal 2016. In fact, a cursory analysis indicates that the world’s second largest economy’s financial markets are outperforming all of their Asian peers. This is particularly true for ADRs, since the MSCI China index, a gauge of the country’s stocks listed in New York and Hong Kong, is up 10.6% year-to-date

Such an increase compares favorably with the S&P 500’s 4% increase and the MSCI Emerging Markets index’s 8.5% gain over the same period. Currently at its highest level since Oct 2016, the index’s success indicates that this may be a good time to pick up and profit from China’s stocks.

Encouraging Earnings Edges Out Concerns Over Protectionism

Ever since President Trump took office, speculation has been rife that his administration will implement policies detrimental for China.  Such concerns first emerged during his campaign, when Trump said he would impose stiff tariffs on the country and designate it as a currency manipulator.

However, investors and fund managers have ignored such fears and chosen to focus on the improvement in corporate results. Companies included in the Hang Seng China Enterprises Index have experienced a decline in their EPS over the past two years. But most analysts and market watchers think earnings will rebound this year.

One estimate puts the increase in earnings at 7.84%, with a similar gain projected for next year. Questions still remain about whether such growth will at all take place. However, stocks from the region still offer great value, given that the MSCI’s forward price to earnings ratio for 2017 stands at 12.5, significantly lower than the S&P 500’s reading of 17.8.

Positive Economic Data Creates Optimism

Meanwhile, recent economic data is also urging investors took take a fresh look at China’s stocks. According to data released on Tuesday, the country’s PPI increased to its highest level since Aug 2011 in January, registering an annual increase of 6.9%. Several economists believe that reform measures being pursued on the supply side have begun to take effect.

Many of these programs were aimed at reducing overcapacity in China’s heavy industries. Their success was evident by last September itself, when a four year decline in factory input costs came to an end. Meanwhile, CPI increased at tis fastest rate in nearly two and a half years in January, by 2.5%, indicating that some of the rise in costs are being passed on to consumers.  

Our Choices

Despite all this evidence, a section of investors remain apprehensive about the fortunes of emerging markets this year. But even though Credit Suisse Group AG announced on Monday that it was now “tactically neutral” on Asia’s equities, its preferred market in the area is still China.

Also, Trump’s promised protectionist policies could snap this rally. But such fears are being ignored by most market watchers and fund managers. After all, straining trade ties with China beyond a point would also hurt the U.S.

This is why this may be a great time to add China’s stocks to your portfolio.  However, picking winning stocks may be difficult.

This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM score.

Yintech Investment Holdings Ltd. is an online provider of spot commodity trading services primarily in China.

Yintech Investment Holdings has a Zacks Rank #1 (Strong Buy) and a VGM Score of A. The company has expected earnings growth of 10.6% for the current year. The forward price-to-earnings (P/E) ratio for the current financial year (F1) is 6.90, lower than the industry average of 17.39. The stock has returned 3.3% year-to-date, underperforming the Zacks Financial - Investment Bank Market sector, which has gained 4.8% over the same period. This provides a good opportunity to buy the stock given that there is significant upside potential

Angang Steel Company Ltd. is engaged in the production, processing, wholesale, and retail of steel and related products in China.

Angang Steel Company has a Zacks Rank #1 and a VGM Score of A. The company has expected earnings growth of 8.6% for the current year. The stock has returned 29.7% year-to-date, outperforming the Zacks Steel - Producers Market sector, which has gained 14.8% over the same period.

NetEase, Inc. (NTES - Free Report) is the operator of an interactive online community targeted primarily at China.

NetEase has a VGM Score of B. The company has expected earnings growth of 21.9% for the current year. Its earnings estimate for the current year has improved by 0.8% over the last 30 days. The stock has returned 19% year-to-date, outperforming the Zacks Internet - Software and Services  Market sector, which has gained 12.8% over the same period. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

China Petroleum & Chemical Corp. or Sinopec, with its head office in Beijing, is one of the largest petroleum and petrochemical companies in Asia.

Sinopec has a Zacks Rank #2 (Buy) and a VGM Score of A. The company has expected earnings growth of 44.9% for the current year. Its earnings estimate for the current year has improved by 75.5% over the last 30 days. The stock has returned 11.8% year-to-date, outperforming the Zacks Oil and Gas - Integrated - Emerging Markets Market sector, which has gained 8.4% over the same period.

COSCO SHIPPING Holdings Co., Ltd. (CICOY - Free Report) is headquartered in Shanghai and is engaged in providing container shipping, dry bulk shipping, logistics services, terminal and container leasing for both international and domestic customers.

COSCO SHIPPING has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 82% for the current year. The stock has returned 40.9% year-to-date, outperforming the Zacks Transportation - Shipping Market sector, which has gained 9.9% over the same period.

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