Continuing January’s success, Chinese equities have started the Year of the Pig on a strong note. Back-to-back gains were registered on the first two days of this trading week as investors returned from the week-long Lunar New Year holiday. Notably, January witnessed record inflows from foreign investors.
Currently, a number of factors are propelling Chinese equities higher. Ongoing U.S.-China trade negotiations have created fresh optimism about a deal which at the least could stave off another bump in tariffs.
The Fed’s newly-found dovish stance is also working in favor of emerging markets. This is why adding select China stocks to your portfolio would make for a smart move.
Largest Monthly Gain Since Last January, Record Foreign Inflows
In January, Chinese equity markets registered their strongest monthly performance in a year. The Shanghai Composite Index increased 3.6%, the highest since January 2018. This represents a strong recovery from 2018’s decline, which led the reverses among the world’s key financial markets.
In January, foreign inflows into Chinese equities amounted to $9.85 billion or 66.4 billion yuan. The largest single-month foreign investment on record poured in through the Hong Kong stock exchange trading link. This was also a major reason for the strong performance of Chinese equities last month.
Attractive Valuations Drive Gains, Foreign Inflows
According to global investment giant Fidelity International, China’s equity market currently represents a great opportunity because of its "very, very attractive" valuations. This in turn is largely responsible for the strong foreign inflows.
According to Wind Financial Information, the CSI 300’s trailing-12-month price/earnings ratio stood at 11.1 on Feb 1, lower than 14.7 at the start of January. Market watchers largely believe that despite recent profit warnings, the worst is largely over.
Hong Hao, who heads research at Bocom International in Hong Kong, thinks earnings estimates have plummeted to historical lows, last witnessed in 1998, 2008 and late 2015. However, a “lot of bad news has already been priced in.”
Fed’s Dovishness, Trade Talks Boosting Gains
The Fed’s new-found dovishness is believed to be another major factor for China’s recent equity market upsurge. A rate hike in March looks unlikely at this point. And the process of balance sheet reduction could also end sooner than expected. Such a soft stance is helping to prop up emerging market equities.
Further, there is new-found optimism about U.S.-China trade ties. On Feb 12 U.S. Trade Representative Robert Lighthizer arrived in Beijing to pursue the next round of high-level trade negotiations. Though conflicting signals have emerged from the Trump administration, markets are increasingly optimistic about a deal.
Following last year’s disastrous performance, Chinese equities have opened 2019 on a strong note. The Year of the Pig is likely to be a good one for equities, with the Shanghai Composite Index already up 7.1% year to date. Attractive valuations, a dovish Fed and optimism over trade talks are the primary factors working in favor.
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.
China Eastern Airlines carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The company’s expected earnings growth for the current year is 76.6%. The Zacks Consensus Estimate for current-year earnings has improved by 37.3% over the past 30 days.
China Southern Airlines Company Limited ZNH is one of the leading air transportation enterprises in China.
China Southern Airlines 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 by 29.8% over the past 30 days.
JinkoSolar Holding Co., Ltd. JKS is a solar product manufacturer with China and international operations.
JinkoSolar has a VGM Score of B. The company’s expected earnings growth for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved by 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.
China Unicom has a Zacks Rank #2 (Buy) and VGM Score of A. The company’s expected earnings growth for the current year is 60.5%. The Zacks Consensus Estimate for current-year earnings has moved 2.2% up over the past 30 days.
China Mobile Limited CHL offers mobile communications services in Hong Kong and Mainland China.
China Mobile carries a Zacks Rank #2 and has a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has improved by 0.7% over the past 30 days.
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