Today is Chinese New Year, heralding the Year of the Pig, according to the country’s zodiac. The pig is a symbol of wealth in Chinese culture so let’s hope that’s a promising sign, because many investors are feeling crabby about China’s prospects right now.
New year, old worries
The country’s economy grew at an official rate of ‘just’ 6.6% in 2018, which may seem enviable by Western standards but marks a 28-year low for China. Worse, the true growth rate is probably well below the official version.
China’s debt mountain is another big worry, with public and private debt now standing at an impossible-to-imagine $34trn at last count, or 266% of GDP. China is challenging but I can think of three reasons why now could actually be a good buy right now.
1. It’s cheap!
Last year, the MSCI China index fell 18.75%, against a drop of 14.24% for emerging markets generally and 12% for the FTSE 100. In a bad year for stocks, China fared particularly badly.
What this means is that China is cheap, or at least, cheaper than it was. So is Asia generally. Andrew Graham, co-portfolio manager at Martin Currie Asia Unconstrained Trust, reckons the region’s markets now trade at a 20% discount to the rest of the world, making this a buying opportunity.
Although China is unlikely to return to the glory days of the BRICs phenomenon, it can still turn on the style. In 2017 MSCI China rose 54.33% (albeit after four disappointing years). Why not get in before the next surge upwards?
2. The trade war may end
The biggest shadow over the Chinese economy right now is US President Donald Trump’s trade war, which is thought to have cost both sides billions of dollars. There is a further round of talks this week amid speculation that some kind of compromise could be found. That would light a rocket under global markets in general, and China in particular.
If no deal isn’t reached by Trump’s 2 March deadline then he may slap 25% tariffs on all of China’s $500bn exports. However, Beijing is responding by fuelling domestic demand, including tax cuts, and this could offset some of the lost export income.
3. The dollar is weakening
The strong US dollar has hit all emerging markets, including China, because it makes their vast dollar-denominated debts even more onerous. As Russ Mould, investment director at AJ Bell points out: “A strong US currency makes it more expensive to service this borrowing, sucking cash out of emerging market economies and hampering growth.”
The dollar was strong in 2018 and China’s renminbi was weak. That may change, with the US Federal Reserve backing away from further interest rate increases and slowing attempts to unwind QE.
You could play a Chinese recovery by purchasing FTSE 100 stocks with exposure to the country, such as high-yielding mining giant Glencore, luxury goods firm Burberry and spirits giant Diageo. Or even luxury sports car maker Aston Martin.
China is risky but there is still a chance that the year of the pig could live up to its name, and spread a little investor wealth around.