As the world’s second largest economy slows this year, I wanted to take a closer look at China-dependent stocks and explore buying opportunities for my portfolio.
China is a massive market, and represents a considerable opportunity for global brands, including those listed on the FTSE. But the government’s zero-Covid policy has introduced uncertainty and clearly appears to be weighing on growth. And that’s pushed down stocks that make a lot of their revenues in China.
However, share prices don’t normally reflect a company’s performance right now. Instead they reflect investor sentiment about the short-to-medium-term outlook, as well as longer-term trends. So while Chinese economic data might look pretty poor right now, this could be a good time to add China-focused stocks to my portfolio.
So, here are three stocks I’m looking at.
Burberry
I actually bought Burberry (LSE:BRBY) stock amid China’s first lockdowns when the price slumped. While I normally hold shares for the long run, within a year I was up 33%, so I took my gains.
But Burberry’s share price has slumped again it recent months. It’s down 18% over 12 months amid slowing sales, notably in China. Lockdowns not only reduce footfall in Chinese stores, but also reduce spending in Burberry shops abroad as travel falls.
However, Burberry should be less impacted by slowing economic growth and inflation than other cheaper brands. It has defensive qualities in that it has a strong brand reputation while high-wealth customers are fairly demand-inelastic and won’t be put off by higher prices.
I’d buy Burberry stock now for the long term, anticipating sales improving next year as China, hopefully, starts to manage Covid-19 in a more business-friendly way.
Rio Tinto
Rio Tinto (LSE:RIO) is highly dependent on iron ore – it contributed 59% of its revenues in 2021. And China is the world’s foremost steel producer – a product that requires iron ore.
The price of iron ore hit record highs of more than $210/tonne in June 2021, but fell below $100/tonne this summer amid weakening demand from China.
Beijing is also threatening to set up an organisation to centralise the procurement of iron ore in an effort to reduce supply issues and lower procurement prices. However, it has threatened to create such an organisation before, but never followed through.
Once again, with the stock down around 20% since its heights earlier this year, now could be a good time to buy. However, I think there might be a little more short-term pain for commodities, so I may hold off purchasing until later this year. In the long run, I’m bullish on demand for resources.
NIO
NIO (NYSE:NIO) is a Chinese EV stock, so is naturally dependent on indigenous demand, but also lockdowns that can hamper production.
The firm, along with other Chinese EV manufacturers, trades with price-to-earnings ratios that are considerably lower than its American counterparts. One reason for this is the concern about further lockdowns and how slowing economic growth will impact demand.
However, once again, hopefully China will learn to manage Covid better in the near term. And long-term trends are positive. China needs to reduce pollution outside of city boundaries and EVs will help that. NIO also has an impressive range of vehicles.
I’ve already bought NIO stock, but would buy more at the current price.