Forget U.S. Stocks; Start Adding Chinese Companies to Your Portfolio

Chinese equities are storming ahead, demonstrating handsome and lucrative returns for investors this year. It may come as somewhat of a surprise for many, given the slowdown concerns around the country at the back end of 2018, which was carried into the start of 2019. However, these fears appear to be very much subsiding, as market players pile into their respective stocks in China as well as into U.S.-listed Chinese companies.

In the first quarter of 2019, domestic Chinese stocks have outpaced every other national market in the world. The CSI 300 Index saw a rally of some 30%, which was its best since the end of 2014 when the country’s equity bubble was starting to take shape.

Initial Concerns about China

At the start of 2019, concerns were heightened around the Chinese economy regarding the potential for a broad slowdown. It appeared that these worries were sparked by the tech giant Apple, which had slashed its Q1 guidance on Chinese headwinds. Back in January, the iPhone maker reduced its revenue expectations for the first time in 16 year because of poor iPhone sales in China. At the time, Moody’s chief economist at Moody’s Analytics Mark Zandi said, “Apple is a bellwether” and that “The iPhone is something that everyone knows and buys, and if people aren’t buying it, then that’s a pretty good sign they’re having a hard time.”

Elsewhere, there were further concerns around China expressed at the start of this year by U.S. construction equipment giant Caterpillar (CAT). The company reported its earnings for Q4 2018, where it blamed a cooling Chinese economy for dwindling profits. Roughly 10% of Caterpillar’s sales come from China. Furthermore, similar disappointing guidance was delivered by another bellwether, Nvidia (NVDA).

Chinese Economy Set for Rebound

China has been laying out plans and taking action to push the country back into solid form. The government is prepared to boost spending, increase foreign firms’ access to its markets, and cut billions of dollars in taxes. Over the last month, there appears to be a notable acknowledgement of a rebound in China’s economy. The manufacturing sector returned to growth, after slipping into contraction territory, according to official PMI reports.

Elsewhere, the IMF upgraded its 2019 growth forecast for China, citing government’s efforts to support the economy and an improved outlook on the tariff situation with the U.S. The IMF detailed within its latest World Economic Outlook report that China is forecast to grow by 6.3% this year, versus the prior projection of 6.2%.

In terms of trade negotiations, the U.S. and China appear to be making significant progress. Talks are set to resume for the remainder of the month.

U.S Listed Chinese Stocks Bullish on Wall Street

There appears to be a growing attraction among U.S investors toward Chinese listed stocks. The tech-based sector is one that has been deemed somewhat popular, closely watched by market players.

BlackRock recently wrote the following in its Q2 2019 Global Investment Outlook: “China is set to be a key turnaround story this year, we are increasingly confident that Chinese growth is likely to reaccelerate from the second quarter onward.”

Given the improvement in the general outlook for China and its promising measures to tackle the touted slowdown, U.S.-listed Chinese stocks could prove to be rewarding. Let’s take a look initially at some of the big Chinese giants that may provide steady gains to your portfolio for this year and beyond.

Baidu (BIDU)

Baidu (BIDU) weekly share price chart.

Baidu, also dubbed the Chinese Google, is a large stock worth exploring as it demonstrates decent value. Shares in Baidu have been within a bearish trend since July 2018, after the price failed to break above an area of supply around $270-$275 range. These heights are the all-time region, which is now proving difficult to break down.

Given the noted downside move, BIDU broke a key ascending trend line of support. It had been comforting the price since February 2016, before being breached in December 2018. The price has since retested the broken support and is moving back south again. It can be seen heading towards a decent area known for buyers, $160-$150.

In terms of fundamentals, the company financials remain strong. Its Q4 2018 revenues rose 22% year-over-year, reaching $3.96 billion. Fiscal 2018 revenues jumped 28% to $14.88 billion.

Alibaba (BABA)

Alibaba (BABA) weekly share price chart.

The e-commerce giant’s shares have been on a steady path higher since its bounce at the start of 2019. Alibaba had been on the decline from June 2018, after printing highs up at around $210. The price went on to drop a significant 38% before finding buyers within a known area of demand near $130. Year-to-date, BABA shares are up 45%, with no signs of a slowdown in sight. Should the bulls continue to press forward and retest the noted highs, this could see the price gaining at least another 15%.

Sinopec (SHI)

Sinopec (SHI) weekly share price chart.

The world’s largest oil refiner, Sinopec, presents some good potential value to investors. The price has stabilized after taking much of a beating from mid-2018 to the end of the year. Shares are up around 19% year-to-date, with further upside eyed. Technically, the next area of resistance is eyed up at the $62-$65 range; this has not bee seen since October 2018. A breakdown of this noted zone could then see a retest of the highs produced in May 2018, $74.10.

Fundamentally, the company’s financials during the most recent earnings quarter were somewhat a cause for concern. Profits dropped 88% in Q4 versus the previous year. Operating profit was down 16% from a record high in 2017. Refining profit tanked 1.15 billion yuan from a year earlier. The soft performance from the stock came in line with the depressed oil market, which was hit massively late 2018. Despite the negative numbers reported from the company, optimism around its outlook remains somewhat healthy. Given the rebound staged in the oil market, allied with the improving economic conditions in China, there is hope for Sinopec shares.

Weibo (WB)

Weibo (WB) weekly share price chart.

Weibo, often dubbed the “Twitter of China” has proven to be significant in terms of running a profitable operation. The Weibo user base continues to see strong growth and has surpassed the audience observed on Twitter. Despite the noted, shares had fallen in March amid concerns over quarterly earnings. The company’s guidance suggested that the momentum for the business could be slowing.

In terms of its financials for the latest quarter, they were not disappointing. The company reported revenue growth of 28% year-over-year to reach $481.9 million, with net income rising 26% compared to hit $183.6 million. The earnings performance came in substantially ahead of the average analyst estimates.

A decent amount of stabilization has been observed with the share price after bottoming around the $55-$50 price range. Eyes will be on a further recovery; there is room for a potential return up to retest the high area seen between February-March 2018 ($140). Should the bulls manage to pick up momentum to the north, then this could be a possible 100% move for the share price.

China Telecom (CHA)

China Telecom (CHA) weekly share price chart.

China Telecom is huge telecommunications business that is largely connected to an ever-growing region. China Telecom last month reported that its net profits rose some 13.9% in 2018. Net profit for the full year rose to 21.21 billion yuan ($3.16 billion), and operating revenue rose 3% to 377.12 billion yuan. Revenue from emerging lines of business rose to 51.9% of service revenue. Selling data and internet and communications services helped service revenues rise 5.9% to 350.4 billion yuan, accounting for most of the operating revenue. Furthermore, mobile users were at 303 million at the end of 2018, rising by a net 53.04 million.

In terms of the share price, it is has been pushing higher since April 2018, moving within an ascending channel formation. Earlier this month it had printed the highest level seen since August 2015. Given the support of the noted pattern structure and the strong company fundamentals, there could much room for more significant upside. There are some price zones to be aware of, particularly $56-$58, $64-$66 and then $76-$78 in terms of barriers for the bulls to tackle.

Featured image courtesy of Shutterstock.

Author:
Ken has over 8 years exposure to the financial markets. During a large part of his career, he worked as an analyst, covering a variety of asset classes; forex, fixed income, commodities, equities and cryptocurrencies. Ken has gone on to become a regular contributor across several large news and analysis outlets.