China bears are ruling the markets’ conversation as the
China Evergrande Group
real estate meltdown follows months of regulatory crackdowns.
But China’s investment landscape is broad, with plenty of companies seemingly on the right side of President Xi Jinping’s economic upheaval. Awful sentiment could offer a buying opportunity for them. “We’ve adjusted our portfolio to be aligned with the government,” says Nuno Fernandes, co-manager of the emerging wealth strategy at GW&K Investment Management.
Beijing’s ire has focused, maybe not coincidentally, on sectors that were foreign investors’ darlings: internet platforms and online education providers. Index performance tells a vivid story. The globally accessible
iShares MSCI China
exchange-traded fund (ticker: MCHI), whose top three components are
Alibaba Group Holding
(3690.Hong Kong), has slid 20% over the past three months. The ETF for domestically listed A-shares (CNYA), topped by drinks maker
(600519.China) and electric-vehicle battery champion
Contemporary Amperex Technology
or CATL (300750.China), are off 5%.
While specific regulatory attacks may be unpredictable, two broad Chinese policy aims seem clear and consistent: beating the West in next-generation technology, and shifting wealth distribution from its current pyramid to a “pear shape” with a bulging middle class. Plenty of listed companies benefit from one or the other of these objectives.
Betting on the technology push is more straightforward. Stocks aren’t cheap, but the current maelstrom may provide entry points. Nick Niziolek, head of global strategies at Calamos Investments, favors CATL, which dominates China’s EV battery space, and
(1211.Hong Kong) among the emerging crop of auto manufacturers. Both stocks have cooled since August after midyear surges.
The intersecting fields of semiconductors, artificial intelligence, and automation are another priority for Xi & Co. So is renewable energy. A company that straddles these interests, Niziolek says, is
(600406.China), which makes power-grid optimization equipment. Its shares are flat for September after a 60% run this year.
Dan Chace, lead portfolio manager for Greater China at Wasatch Global Investors, adds
Sino Wealth Electronic
(300327.China), which makes circuits for home appliances. Its stock is also taking a breather, after a 150% run-up from January to September. Both managers are keen on
(2269.Hong Kong), whose testing and lab nexus anchors China’s catch-up drive in pharmaceuticals.
Fernandes of GW&K is thinking more about what happens if Beijing gets “common prosperity” right and “the next 600 million Chinese reach the middle class.” That’s a more speculative proposition. Valuations in relevant stocks are also less challenging. Fernandes and co-manager Tom Masi favor names like insurer
(1299.Hong Kong), the “Marriott of China” hotel chain
(HTHT), and online brokerage
East Money Information
(300327.China) as magnets for a broader consuming class.
Few investors are holding their breath for a broad-based China rebound. Xi’s soak-the-rich pivot is popular, which makes it look more like a course shift than a fad, says Michael Kelly, global head of multi-asset at PineBridge Investments. “This is a meaningfully long shift from growth to supporting the middle class,” he says. On the other hand, “if you align yourself with the state’s policy, there will be some smashing success stories.” The tough part is picking them.