Consider Investing in China Stocks as an Alternative Amidst High U.S. Market Levels
If you’re feeling hesitant about investing in U.S. stocks due to high valuations, it may be time to consider China stocks as an alternative. Contrary to what you may think, the negative headlines surrounding China actually present an opportunity. The sentiment towards Chinese stocks is overwhelmingly negative, indicating that it may be the perfect time to get exposure to this market. Additionally, valuations for China stocks are currently discounted, providing further support for investing in this sector.
The FTSE China A50 Index and China’s CSI 300 Index are trading at valuations not seen in years. These indices recently traded at around 10 times trailing earnings, which is not much above the low of eight times seen in 2015. This suggests that there is potential for significant upside in Chinese stocks.
Despite the numerous concerns surrounding China, such as global trade wars, military tensions with Taiwan, and a slowdown in the Chinese economy, these fears have already been priced into the market. Furthermore, there are several factors that could potentially change and improve investor sentiment towards China.
Firstly, China’s President Xi Jinping has shifted his focus back to economic growth. This has several bullish implications, including the possibility of fiscal stimulus being announced at an important policy meeting taking place in China. Fiscal stimulus could help boost growth as the current loose monetary policy has not been effective in stimulating loan demand.
Secondly, China is directing capital towards key growth sectors such as electric vehicles, industrial automation, and chip manufacturing. Investments in these sectors are already showing early signs of success and could significantly improve investor sentiment.
Lastly, the Chinese government is actively buying stocks to support the equity market. They have also implemented new restrictions on short selling and are encouraging high-net-worth clients to move into stocks from deposits. These actions by the government demonstrate their commitment to stabilizing and supporting the stock market.
One major concern about China is the potential for a systemic crisis due to over-leveraged property owners. However, these fears may be exaggerated as the government has been reducing the amount of debt property managers can hold since 2020. Additionally, China’s banking system has been building capital reserves over the past decade, making it capable of absorbing losses at Chinese property developers.
When considering specific stocks to invest in, Morningstar recommends Baidu, JD.com, Tencent Holdings, and NetEase. Baidu is a cyclical business that could benefit from improved economic growth. JD.com is focusing on cutting low-margin products and utilizing AI to enhance its services. Tencent Holdings owns popular mobile gaming titles and has significant untapped value in its messaging apps and other services. NetEase is the second-largest mobile game company in China and has been expanding internationally.
If you’re interested in investing in China stocks, the Rayliant Quantamental China Equity ETF provides exposure to local-market listings and has a cyclical tilt. The fund is overweight in sectors such as basic materials, financial services, industrials, and technology.
Overall, despite the negative sentiment and concerns surrounding China, now may be an opportune time to consider investing in this market. The discounted valuations, potential for positive changes, and specific companies with strong growth prospects make China stocks an attractive alternative amidst high U.S. market levels.
