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China Ends One Child Policy: Stocks & ETFs to Watch

Zacks Equity Research

Reforms – whether financial or demographic – are rampant in China. The ride has long been rocky for this economy, with a 24-year low growth seen last year and not much respite seen so far in 2015.


Only recently in Q3, the Chinese economy expanded 6.9%, outperforming the forecast of 6.8% by a whisker but fell from 7% recorded in Q2. This was the lowest growth in China since 2009, reinforcing the loss of momentum in its economic growth story (read: Inside The Crash in China ETFs).


The government left no stone unturned to jumpstart the economy and tried out a host of accommodative measures in vain. Beijing now feels that a demographic reform is also necessary and has put an end to the country’s decades-long infamous one child policy. The restriction is now scrapped with hopes of huge demographic gains down the road. Couples will now be permitted to have two children (read: China ETFs in Focus on Surprise Rate Cut).

 

Put into effect in 1979, the policy is expected to have put off about 400 million births. However, concerns over China's ageing population and the resultant shortage of workers and consumers prompted this move. The working-age population contracted last year for the first time in two decades, per Bloomberg, posing a threat to the economy’s already-wavering growth profile.

 

Previously, China eased the policy slightly in 2013, scrapping this constraint for couples comprising at least one member who is an only child. This effort fell shy of the government’s aim of raising births by 2 million per year. Investors should note that China has long been working on stepping up domestic consumption, shedding focus on exports and intending to move to a ‘slower and more balanced growth’ economy.

 

Corporate Impact of Baby Boom


Quite expectedly, companies selling all baby-related goods and services will be the immediate beneficiaries from the end of China’s 36 years of one-child policy. Wall Street Journal noted that China’s milk-formula market will likely gross about $20 billion in 2015, accounting for 42.6% of the global total, per the market-research firm Euromonitor International.


While this growth rate is not all a light one by any measure, the recent relaxation in child policy should give this market a further boost. Moreover, over the long run, the Real Estate and Education sectors will also get a lift from this demographic policy easing.


Needless to mention, the Chinese stocks added gains following the decision with diary stocks leading the market. The optimism was also noticed in a number of global diary giants selling products in China. Of course, companies selling products related to baby care are also equally delighted. Below we highlight four U.S. stocks pertaining to baby products that can gain on the changes in the Chinese family planning norm.


Mead Johnson Nutrition Company (MJN)


This Illinois-based company manufactures, distributes, and sells infant formulas and nutritional products. China is the company’s biggest market with one third of sales being generated from there. Shares of MJN jumped 3.8% on October 29 on the news, which represents a two-month high. However, MJN has a Zacks Rank #5 (Strong Sell) with growth score of ‘C’. MJN is down 17.7% so far this year (as of October 29, 2015).


The Procter & Gamble Company (PG)


The Procter & Gamble Company is into Beauty, Hair and Personal Care; Grooming; Health Care; Fabric Care and Home Care; and Baby, Feminine and Family Care. Baby wipes, diapers, and pants belong to the last segment. Notably, PG derives about 8% of sales from Greater China and is thus expected to see a meaningful positive impact from this easing. PG has a Zacks Rank #3 (Hold) with a Growth and Value scores of ‘C’. PG is down 15.5% so far this year (as of October 29, 2015) and advanced 0.7% as a reaction to the news.


Kimberly-Clark Corporation (KMB)


This is yet another diaper-making company with considerable exposure in China. KMB has Zacks Rank #3 with Growth and Momentum scores of ‘B’ and Value score of ‘C.’ KMB was up 0.8% on October 29 and has added 5.4% year to date.


Johnson & Johnson (JNJ)


The company is renowned name in baby care products along with its other health care offerings. Its huge global exposure makes it a must-watch on the China issue. The Zacks Rank #3 stock has Momentum score of ‘A’, value score of ‘B’ and growth score of ‘C’. JNJ added 0.9% on October 29 but is down 3% year to date.


A Look at the Chinese ETF World


Be it over short or the long term, the Chinese economy and its market will reap the maximum benefits and thus China ETFs warrant a look too (read: Time for China ETFs?).


China Consumer ETF (CHIQ)


An end to the one-child policy will translate into higher consumption over the long term making CHIQ a good bet. This 41-stock product offers exposure to the consumer sector in China. The ETF is heavy on retailing and food beverage & tobacco. Expense ratio of this $93.4 million-ETF is 1.94%. The fund is up 6.9% year to date. The product has a Zacks ETF Rank #3 with a High risk outlook.


iShares MSCI China Small-Cap ETF (ECNS)


A domestic economic surge can be best-played by the smaller capitalization. This makes ECNS an intriguing pick. The fund looks to track the MSCI China Small Cap Index and offers exposure to the performance of stocks in the bottom 14% by market capitalization of the Chinese equity securities markets, as represented by the H-Share. The fund is an overlooked choice with just $27.7 million in assets.


This Zacks ETF Rank #3 fund charges 62 bps in fees. As much as 70.2% of the stocks hail from China while the rest belong to Hong Kong. The fund is heavy on Consumer Discretionary (21.9%) followed by Industrials (17.8%). The fund is up just 0.4% so far this year.


Deutsche X-trackers Harvest CSI 500 China A-Shares Small Cap ETF (ASHS)


This product is a combination of China A-shares and smaller capitalization. This ETF attempts to replicate the performance of the CSI 500 index, which tracks 500 small cap companies on the Shanghai and Shenzhen stock exchanges. 


This $42.7 million-fund charges 80bps in fees. Industrials (25.34%) and Consumer Discretionary (15.64%) are the top two sectors. ASHS gained 1.3% following the news and is up 21.8% so far this year. The fund currently has Zacks ETF Rank #4 (Sell).


CSI China Five Year Plan ETF (KFYP)


Since the news revolves around the government reform, a look at the ETF related to China's Five Year Plan seems a decent idea. This fund tracks the CSI China Overseas Five Year Plan Index, holding 139 securities in its basket. About one-third of the portfolio is skewed toward Consumer Discretionary, closely followed by Information Technology (30.7%) and Industrials (16.1%). The fund is unpopular as depicted by its AUM of $3 million. Expense ratio came in at 0.71%. The fund is down 13.8% year to date.


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MEAD JOHNSON NU (MJN): Free Stock Analysis Report
 
PROCTER & GAMBL (PG): Free Stock Analysis Report
 
KIMBERLY CLARK (KMB): Free Stock Analysis Report
 
GLBL-X CHIN CON (CHIQ): ETF Research Reports
 
ISHARS-MS CH SC (ECNS): ETF Research Reports
 
DEUTS-XT HV CS5 (ASHS): ETF Research Reports
 
KRANS-C CHN 5YP (KFYP): ETF Research Reports
 
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