On Feb 25, China stocks officially entered the bull-market territory with major indexes registering record gains. Chinese investors indulged in profit-taking on Feb 26 after registering phenomenal gains. While naysayers expressed doubts over the current rally, optimists think that this minor correction is the ideal entry point for investors.
The major catalyst for Monday’s gains was President Trump’s decision to postpone additional tariffs slated to be levied on $200 billion of Chinese imports starting Mar 1. Further, China’s government is implementing stimulus and undertaking wide ranging reforms to rejuvenate its economy. These factors make it the ideal time to invest in China stocks to capitalize on the ongoing rally.
Shanghai Composite, CSI 300 Enter Bull Market
On Feb 25, the Shanghai Composite gained 5.6%, its best single-day percentage advance since June 2015. At that point, shares had gained 20% from their Jan 3 low, perfectly matching a popular definition of a bull-market. The small-cap Shenzhen Composite added 5.6% while the large-cap CSI 300 increased 6%, also entering the bull-market territory.
China stocks have notched substantial gains in 2019 with the Shanghai Composite up nearly 18% year to date. However, the immediate catalyst for these gains was Trump’s tariff postponement decision.
Further, the U.S. President is set to meet his Chinese counterpart at the end of March to seal a long-lasting trade deal. (Read: U.S., China Move Closer to Trade Deal: 6 Winners)
Stimulus, Financial Reforms to Power Long-Lasting Gains
Till recently, Chinese authorities had stuck to an austere stance on stimulus. This led to fixed-asset investment declining from more than 20% to below 6%. However, “aggregate financing to the real economy” increased by 4.64 trillion yuan ($685 billion) in January.
Analysts at credit market research firm CreditSights think January 2019 witnessed the “fastest single-month growth since records began in 1992”. The surge in financing was spearheaded by state-owned banks which increased lending by 3.57 trillion over last month.
This indicates a significant shift in stance, possibly an attempt to address the recent economic weakness. Meanwhile, the prospect of widespread financial sector reforms boosted brokerage stocks on Feb 25. Gains were powered by president Xi Jinping’s comments at a politburo meeting where he said that China will intensify financial reforms and work toward opening up the financial sector.
Despite Tuesday’s reverse, China’s equity markets now have the makings of a long-lasting rally. A trade truce on one hand and stimulus and financial reforms on the other provide the perfect ingredients for strong gains over the year. Investors will now find it difficult to ignore stocks from the second-largest economy in the world.
This is why it is prudent to invest in China stocks at this point. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
China Eastern Airlines Corporation Limited CEA is involved in the civil aviation industry in China as well as internationally.
The company carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of B. The company’s expected earnings growth for the current year is 76.6%. The Zacks Consensus Estimate for current-year earnings has improved 37.3% over the past 30 days.
China Southern Airlines Company Limited ZNH is one of the leading air transportation enterprises in China.
The company carries a Zacks Rank #1 and has a VGM Score of A. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 29.8% over the past 30 days.
JinkoSolar Holding Co., Ltd. JKS is a solar product manufacturer with China and has international operations.
The company has a VGM Score of B. The company’s expected earnings growth for the current year is 60.9%. The Zacks Consensus Estimate for current-year earnings has risen 93.5% over the past 30 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
China Unicom (Hong Kong) Limited CHU is engaged in the provision of cellular, paging, long distance, data and Internet services worldwide.
The company has a Zacks Rank #2 (Buy) and a VGM Score of A. The company’s expected earnings growth for the current year is 60.5%.
RYB Education, Inc. RYB provides educational services, primarily in China.
The company carries a Zacks Rank #2 and has a VGM Score of A. The company’s expected earnings growth for the current year is more than 100%.
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