2016 has been all about China because the Chinese stock market has produced some exceptionally volatile trading sessions, with shares suspended on numerous occasions due to that volatility. In fact, the Chinese regulator even suspended the ‘circuit breaker’ (which halted trading during highly volatile periods) to try and reduce panic among investors.
Clearly, the world’s second-largest economy is undergoing major change. It’s seeking to become less dependent on major capital expenditure for economic growth and more reliant on consumer-led growth. It’s a rather painful transition and in the short run, is causing a high degree of fear and worry among investors globally, mainly because it’s causing China’s high growth rate to fall.
Looking ahead, a more balanced Chinese economy is likely to be good news for investors worldwide and is a natural shift as the country becomes more prosperous. It’s unrealistic to expect any country to build huge infrastructure projects indefinitely and to expect its population not to aspire to greater wealth and improved futures for themselves.
And by backing the right companies, investors can benefit from stronger consumer demand in China, with 326m Chinese set to move into the middle-income bracket of earnings during the next 15 years.
Credit where it’s due
For example, demand for credit is likely to increase. Therefore, buying shares in HSBC (LSE: HSBA) appears to be a sound long-term move since it’s exceptionally well-positioned to benefit from higher spending among China’s population. With its shares trading on a price-to-earnings (P/E) ratio of 9.5, they’re incredibly cheap and indicate that an upward rerating is on the cards.
Certainly, HSBC’s costs have spiralled and need to be reined-in. But it’s already beginning to implement a major efficiency programme so its bottom line is likely to be positively catalysed over the medium term and this could help to boost investor sentiment. Plus, HSBC yields 6.8%, which highlights just how attractive it is as an income play, too.
Best foot forward
Also having the potential to benefit from higher consumer spending in China is Jimmy Choo (LSE: CHOO). Its shares have performed poorly in 2016 and are down by 14% since the turn of the year, which puts them on a price-to-earnings growth (PEG) ratio of just 0.9.
Undoubtedly, 2015 is due to have been a difficult year for Jimmy Choo, with its bottom line likely to have declined by 8% when it reports full-year numbers. However, with earnings growth of 22% pencilled-in for 2016 and the company having the scope to diversify into new product categories, long-term growth prospects remain very sound. That’s especially the case as a result of its focus on China as a growth market in the coming years.
Quality counts
Also likely to benefit from a more consumer-focused China is Reckitt Benckiser (LSE: RB). Its diverse range of consumer staples are likely to experience increasing demand there, but also from the wider emerging and developed worlds. As such, Reckitt Benckiser remains a highly defensive stock which, given the high degree of volatility present in global stock markets, could prove to be a useful ally in Foolish portfolios in the coming months.
While the bottom line is forecast to rise by a modest 7% in 2016, its P/E ratio of 23.2 may be viewed as rather high by many investors. Certainly, the company has excellent long-term growth prospects and is a quality business, but it could be worth waiting for a keener valuation before buying a slice of it.