How to Position Yourself as China Becomes World’s Biggest Economy
I’m not sure how many of my Daily Gains Letter readers realize that Chinese stocks, as reflected by the Shanghai Composite Index (SCI), have outperformed the S&P 500 so far this year. After offering up underwhelming performances since 2009, the SCI has rallied 9.98% this year, compared to 8.44% for the S&P 500 and 3.23% for the Dow Jones Industrial Average as of Monday.
We’re not talking about resurgence in Chinese stocks and a return to the glory days more than five years ago; instead, I’m simply saying there’s finally some buying in an oversold Chinese stock market.
Chart courtesy of www.StockCharts.com
Of course, there’s the high anticipation of China-based Alibaba (NYSE/BABA) joining the U.S. capital markets on September 19; this move will likely stroke the enthusiasm of investors here. The Internet services company is massive and will give U.S. companies a run for their money, further opening the U.S. market to consumers and businesses worldwide. You can wait and pick up shares of Alibaba or you can play the company via Yahoo! Inc. (NASDAQ/YHOO), which holds a 23% stake in Alibaba.
Now, if you’re a regular reader, you may know that I have been, and continue to be, bullish on the Chinese economy and China. Yes, the economy is stalling, but we are still talking about growth of around 7.5% this year, which is far greater than the rest of the G7 countries.
Just like Facebook, Inc. (NASDAQ/FB) in the social media market with its more than one billion users and enormous potential, I feel the same towards China and its 1.3 billion people. When you have a market that’s so significant, you really have to believe there are humongous opportunities.
I just read an article on CNBC that said that as far as size, based on U.S. dollars, China will overtake the U.S. economy by 2024, according to IHS Economics. (Source: Holliday, K., “China to become largest economy by 2024,” CNBC web site, September 7, 2014.) IHS estimates the Chinese economy will expand to $28.25 trillion in 2024, compared to $27.31 trillion for the U.S. based on nominal values. The gross domestic product (GDP) growth in China will be propelled by consumer spending, something that I have touched on numerous times in the past.
In China, President Xi Jinping, who came onboard in March 2013, has adopted an aggressive strategy to drive Chinese consumer spending to push GDP growth and lessen the dependence on foreign investment and demand for the next 10 years. This strategy makes a whole lot of sense, given the massive population and growing per-capita income.
China is employing its citizens to band together and spend—and it’s working. Retail spending is growing at around 12% in China, which is impressive given the muted domestic growth. The IHS report predicts the Chinese consumer spending market will surge to $10.5 trillion by 2023, or about 37.17% of GDP, which is still far below the 70% rate in the U.S., so there’s more room to grow.
To play the growth over the next decade, you can buy U.S.-listed Chinese stocks or look to exchange-traded funds (ETFs) that focus on the country.
In the Chinese consumer spending area, the Global X China Consumer ETF (NYSEArca/CHIQ) is worth a look. The ETF comprises about 63% consumer cyclical and 32% consumer defensive plays and is set to rise as consumer spending increases.
To play China’s DOW equivalent, investors may take a look at ETFs like iShares China Large-Cap (NYSEArca/FXI). For more aggressive investors looking for added growth and risk, an ETF like the PowerShares Golden Dragon China ETF (NYSEArca/PGJ) is worth a look.