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China Stocks Shatter 1-Year High: 5 Great Picks

Swarup Gupta

On Apr 4, equities in China breached their highest level in a year. Additionally, the blue-chip CSI 300 Index posted its fourth consecutive weekly advance. Gains for the trading session and the week were largely attributable to rising optimism over a near-term U.S.-China trade deal. Reports have emerged that the two countries are extremely close to sealing an agreement.

Meanwhile, fresh evidence has emerged that the Chinese government’s stimulus measures are making an impact. Official and private indexes of manufacturing and services have shown significant improvement.

It is also extremely likely that authorities will take further steps to boost China’s sluggish economy. This is why market watchers at large think that this is a great time to invest in China stocks.

Optimism Over Trade Deal Rises

According to a Financial Times report on Apr 3, the United States and China have managed to settle most of their differences on trade issues. Only a few areas of divergence remain, per Myron Brilliant, executive vice president for international affairs at the U.S. Chamber of Commerce. According to him, trade negotiations are “getting into the end-game stage.”

Brilliant added: “Ninety percent of the deal is done.” He claimed that a few sticking points remain, which could prove difficult to resolve. Apparently, China wants the United States to suspend all tariffs currently in place. However, the Trump administration is not very excited about the idea since it wishes to retain an enforcement mechanism even after a deal is struck.

According to the Financial Times, if a deal proves elusive even after the current round of talks concludes in Washington, the next round of talks could be held in June at the G-20 meet in Japan.

But such an unfavorable outcome to the current round of talks seems unlikely with Trump’s economic adviser Larry Kudlow claiming on Apr 2 that both countries “expect to make more headway.” Kudlow added that there is a “certain amount of optimism” about this round of discussions.

Economic Metrics Improve, Additional Stimulus Likely

In March, China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) increased from 49.9 in February to 50.8 in March. The expansion was the fastest pace witnessed in eight months.

The report comes on the heels of Apr 31’s official figures, which also indicate that China’s manufacturing sector improved in March. The official Purchasing Managers’ Index recovered from February’s three-year low of 49.2 to hit to 50.5 in March. This marks the first expansion in four months. (Read: ISM Manufacturing Index Rebounds From 2-Year Low: 5 Top Picks)

Further signs of a recovery were visible on Apr 3, with the Caixin China services purchasing managers index touching a 14-month high in March. This is a clear indication that government stimulus measures are having their desired effect.

Meanwhile, analysts believe that China’s central bank will reduce cash reserve requirements soon to boost liquidity and consequently the country’s economy. Additionally, state media said on Apr 3 that the government will reduce fees and service charges in order to lower costs for individuals and companies. 

Our Choices

Fresh optimism over a near-term trade deal is propelling Chinese equities to new record levels. Additionally, enough economic evidence is now available to suggest that the government’s stimulus measures are having an impact.

It comes as no surprise, therefore, that the Shanghai Composite and the CSI 300 are up 30.2% and 34.9%, respectively, year to date and are likely to rise further. Investing in Chinese stocks looks like a smart option at this point. However, picking winning stocks may prove to 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.

LexinFintech Holdings Ltd. LX is an online consumer finance platform for young adults primarily in China.

LexinFintech has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 16.3% over the past 30 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

JD.com, Inc. JD operates as an online direct sales company in China.

JD.com has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 59.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 10.2% over the past 60 days.

CNOOC Limited CEO engages primarily in the exploration, development and production of crude oil and natural gas offshore China.

CNOOC has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 4.6% for the current year.

OneSmart International Education Group Limited ONE is a provider of tutoring services in China.

OneSmart International has a Zacks Rank #2 and VGM Score of B. The company has expected earnings growth of 81.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the past 60 days.

Yirendai Ltd. YRD is involved in online consumer finance business.

Yirendai has a Zacks Rank #2 and VGM Score of A.

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