China has been one of the top-performing stock markets globally so far in 2019 despite sluggish economic growth and a prolonged trade war (more than 20 months) with the United States.
Notably, despite the U.S. ban on well-known companies like Huawei and Hikvision, the CSI 300 Index has surged more than 35% year to date. This is significant growth compared to the 25% drop witnessed by CSI in 2018.
Additionally, the 32.6% year-to-date return of XTrackers CSI-300 China A-Shares (ASHR) ETF reflects the robust performance. Meanwhile, the S&P 500 composite and Japan’s Topix have rallied roughly 26.1% and 18.2%, respectively, in the same time frame.
Higher Subsidies & Favorable Monetary Policy to Aid Growth
China is the world’s second-largest economy based on its stock market, measured by market cap.
Moreover, the year-to-date outperformance of the CSI 300 reflects continuing growth in the China market. According to a Financial Times report, Shanghai and Shenzhen bourses have added $1.4 trillion to market capitalization (as of Nov 3), driving the total value of onshore equities to roughly $6.8 trillion. This suggests improved domestic investor confidence and increased international inflows.
China’s decision to remove investment quotas under the Qualified Foreign Institutional Investor (QFII) scheme and the renminbi qualified foreign institutional investor (RQFII) program helped increase foreign inflows.
Per Xinhua, which cited the Ministry of Commerce (MOC), foreign direct investment (FDI) into the Chinese mainland grew 6.6% year over year to 752.41 billion yuan ($107.07 billion) in the first 10 months of the year.
Furthermore, global exposure of China-based stocks has improved as major index providers are raising the weights of China A-shares in their global benchmarks. Notably, MSCI increased the weights of China A shares in certain indexes by hiking the inclusion factor to 20% from 15% late November onward.
The stupendous growth can be attributed to the China government’s planned stimulus and corporate subsidies. Per Forbes, which cited a Nikkei report, corporate subsidies increased 15% in the first nine months of 2019.
Moreover, China’s central bank announced several cuts in reserve requirement ratios (RRRs) this year to release billions of yuan for some small and medium-sized banks.
Additionally, the People’s Bank of China’s (PBOC) decision to slash a key interbank interest rate on Nov 18 reflects the government’s plan to boost growth.
Further, China is beefing up the fiscal stimulus. Beijing has approved eight fixed-asset investment projects in November worth 7.1 billion yuan.
Easing Trade War Fear to Boost Prospects
The recently announced Phase One of the trade deal, wherein the United States has agreed to ease tariffs on certain exports from China, is a significant step to reduce stress over the prolonged trade war.
Per the recent developments, the United States will reduce the tariff burden on certain agricultural, manufactured and energy products. According to a report by Bloomberg, tariff relaxation will be applicable for $120-billion worth products carrying import duties of 15%. However, it will continue to maintain a 25% levy on $250 billion of Chinese goods.
Moreover, the United States has affirmed that it will bring into force new policies pertaining to intellectual property, currency and forced technology transfers. Also, the nation will suspend import taxes on nearly $160-billion worth of products, including smartphones and toys. In exchange, China’s purchase of goods and services from the United States is likely to increase nearly $200 billion in the coming two years.
The deal, if signed, is expected to boost China’s GDP. The International Monetary Fund projects growth of 6% for 2020, better than its October projection of 5.8%.
Although China’s GDP growth has touched the lowest level this year in almost three decades, the projected expansion rate is significantly higher than the United States and Japan.
Here, we have highlighted a few stocks China stocks that hold promise for investors in 2020, given the aforementioned factors.
With the help of our Zacks Stock Screener, we have picked six stocks that have a market cap of more than $5 billion and carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Headquartered in Beijing, Baidu (BIDU - Free Report) is a Chinese-language Internet search provider. The company sports a Zacks Rank #1 and has a market cap of $43.26 billion.
In the past 60 days, the Zacks Consensus Estimate for 2020 earnings has soared 41.5% to $8.45 per share.
However, the stock has lost 20.1% year to date due to the U.S.-China trade war and macro-economic headwinds.
Beijing-based NetEase (NTES - Free Report) also sports a Zacks Rank #1. Shares of this $38.97-billion worth online gaming services, e-commerce and advertising services provider have returned 28.2% year to date.
The Zacks Consensus Estimate for 2020 earnings has increased 13% to $15.14 over the past 60 days.
Momo’s (MOMO - Free Report) shares have returned 53.9% on a year-to-date basis. This Beijing-based company has a Zacks Rank #1. This mobile-based social networking platform provider has a market cap of $7.67 billion.
The consensus mark for 2020 earnings has been revised 3.1% upward to $3.37 per share over the past 60 days.
Shanghai-based Semiconductor Manufacturing International (SMICY - Free Report) sports a Zacks Rank #1 and has a market cap of $7.30 billion.
The Zacks Consensus Estimate for 2020 earnings has jumped 66.7% to 10 cents per share over the past 60 days.
Beijing-based New Oriental Education & Technology Group (EDU - Free Report) is a provider of private educational services in China. The company offers language training and test preparation courses, online education programs and overseas studies consulting services.
New Oriental Education has a Zacks Rank #2 and a market cap of $17.83 billion. The Zacks Consensus Estimate for fiscal 2020 earnings has increased 1.8% to $3.44 per share over the past 60 days.
Guangzhou-based Vipshop Holdings Limited (VIPS - Free Report) is an online discount retailer for brands. The company offers branded products to consumers in China through flash sales on its vipshop.com website. This Zacks Rank #2 stock has surged 160.1% on a year-to-date basis.
The Zacks Consensus Estimate for 2020 earnings has been revised 2.5% upward over the past 60 days.
Zacks Top 10 Stocks for 2020
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?
These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.
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