Why China Needs to Be a Key Investing Area
Just when we thought a resolution to the U.S.-China trade war was finally going down the home stretch and there was going to be a grand celebration at the White House or Donald Trump’s winter palace at Mar-a-Lago, this was not to be the case (yet).
What started as a threatening tweet by President Donald Trump on May 5 became a reality when the U.S. raised the ante by increasing tariffs to 25% on $200.0 billion of Chinese goods at the stroke of midnight on May 10.
While the U.S. stock market fell on the tariff news, the Shanghai Composite Index jumped 3.1% in a somewhat strange reaction.
Compared to stocks in the S&P 500, Chinese stocks are actually outperforming this year.
Chart courtesy of StockCharts.com
Perhaps traders believe that the potential impact of the tariffs won’t be as destructive as many believe. But if the U.S. decides to place tariffs on the other $325.0 billion of Chinese goods, the result could be quite damaging to both the Chinese and U.S. economies, as well as to the global economy.
The reality is that tariffs are essentially taxes on consumers and, in my view, are counterproductive in the long term and not good for the economy and stock market.
It’s true though that something has to be done to reduce the massive trade deficit and other structural adjustments in China.
The Bull Case for China
While the Chinese economy will be hurt more than others by the U.S. tariffs, the damage will not continue forever. That’s because China is rapidly expanding its global trade to other markets via its ambitious “Belt and Road Initiative” that recently attracted over 40 heads of state to an information session.
So, while we are all fussing about the current U.S.-China trade war, the long term remains extremely bullish for China and its grand economic aspirations.
Think about it this way: China has a massive consumer market of over 1.3 billion people and a rapidly growing middle class that is bigger than the U.S. population.
In addition, its Belt and Road strategy will give China access to billions more customers. There is India, with a population of 1.4 billion, and the emerging economies in Asia, Latin America, and Africa.
The long-term potential for strong returns in China is huge and will only get bigger.
We have seen the majority of the large bellwether Chinese stocks sell off on the U.S. trade concerns, but in my view, this weakness presents buying opportunities.
Chinese companies like Tencent Holdings Ltd (OTCMKTS:TCEHY, HKG:0700), Alibaba Group Holding Ltd (NYSE:BABA), and Baidu Inc (NASDAQ:BIDU) are market leaders in China and their stocks are worth looking at during the weakness.
I’m pretty sure you will be thinking back years from now and realizing how great the opportunity was for Chinese stocks in 2019.
Yes, there will be obstacles along the way, but astute investors understand that the global economy will become even more critical as time goes on.
Investing a small allocation in major Chinese companies now could be a key to partaking in future growth.