Tapping into China's economic recovery
Updated 14:32, 16-Jul-2020
Daryl Guppy
Skyscrapers and people are reflected in a puddle of water in the early morning at the bund in Shanghai, the landmark of Shanghai, East China, October 20, 2015. /Xinhua

Skyscrapers and people are reflected in a puddle of water in the early morning at the bund in Shanghai, the landmark of Shanghai, East China, October 20, 2015. /Xinhua

Editor's note: Daryl Guppy is an international financial technical analysis expert. He has provided weekly Shanghai Index analysis for Chinese mainland media for more than a decade. Guppy appears regularly on CNBC Asia and is known as "The Chart Man." He is a national board member of the Australia China Business Council. The article reflects the author's opinion, and not necessarily the views of CGTN.

Despite a concerted campaign of coercion designed to subvert and throttle the Chinese economy, the Shanghai Index has added 30 percent since March and a strong 16 percent in the past 10 days. 

This is is a strong breakout above the long-term historical resistance level near 2980 and the Index is approaching the highs of February 2018. There is potential for another 30 percent rise and this is attracting international investment attention because the Chinese economy is almost alone in realistically forecasting growth for 2020 and beyond.

One way or another, China is an essential component of any balanced investment portfolio. Progress with the Cross Connect program between Hong Kong and the Shanghai and Shenzhen exchanges has made direct market access easier. Foreigners have five options for investing in the Chinese economic recovery.

The first option uses an Exchange Traded Fund (ETF) that tracks the Shanghai Index. These ETFs give investors a return matching the performance of the underlying index - recently 16 percent over 10 days. Some of these are based on the Shanghai Index futures contracts rather than a basket of Shanghai listed stocks. 

There is a small hitch in this approach because not all China ETF "index" funds are the same. Some ETFs include a mixture of mainland listed stocks and Hong Kong listed Red Chips. These mixed ETFs provide another method to participate in the China market.

Direct exposure to the Shanghai Index without the "contamination" of Hong Kong listing is preferred by many investors. These index returns can be super-charged in some markets by using Contracts For Difference. These CFD derivatives provide leveraged access to the Shanghai Index movement and multiply the returns available.

The second option is direct investing in mainland companies. This is enabled by the Cross Connect program and its participating brokers. Few Western investors can read Chinese, and this makes it difficult to apply the fundamental analysis methods used in investing in Western Markets. 

Information is slow to be translated, so stock selection is based on pure technical and chart analysis. The focus is on strong trend behavior and trend breakouts and these can be identified with the same type of technical scans that are applied to Western markets.

Returns from recent Shanghai-listed trades in the health care sector range from 50 percent for Humanwell Health Care Group since April to 80 percent for Tonghua Dongbao Medicine. 

Benefiting from the consumer rebound, Wangfujing Group has returned over 400 percent since May while internationally recognized Qingdao Brewery has delivered 90 percent in the same period.

Direct investing is not for everyone so three alternatives offer a proxy for investing in the Chinese economy. Investors may be more familiar with these locally listed companies and have more confidence in their management and reporting procedures. This provides a method of indirect investing in the Chinese economic recovery. 

However, there is a new developing risk emerging for this approach. It comes from increasing U.S. coercive behavior applied through sanctions and black listings.

These investment methods involve individual company risk so a bad choice can underperform the Shanghai Index and a good choice can outperform the index.

The first group for indirect investing are companies that export to China and which have a direct relationship with the strength of the Chinese economy. This includes stocks like Australia's Fortescue Mining which is a major supplier of iron ore. Their fortunes are tied to infrastructure stimulus in response to COVID-19. 

An outside view of the Shanghai Stock Exchange (SSE), China. /Xinhua

An outside view of the Shanghai Stock Exchange (SSE), China. /Xinhua

The Chinese consumer market remains hungry for imported products. Investment in these suppliers is an effective way to enjoy the benefits of the expansion of the consumer segment of the Chinese economy. 

New Zealand suppliers of manuka honey and Australian infant milk formula exporters all have well-developed consumer acceptance in China. 

The second group suitable for indirect investing are companies with well-established domestic business in China. The obvious candidates are Starbucks and other international chains which derive much of their income from China. 

General Motors is another candidate for indirect investing in China because it sells more cars in China than in the rest of the world combined. 

These are businesses that are almost local in China like Singapore-based Food Republic which provides an investment avenue with stores in Beijing and elsewhere. 

Singapore's CapitaLand has shopping malls in Tier 1 and Tier 2 cities. These businesses are directly plugged into the growth of the Chinese economy and the consumer recovery.

The final indirect investment approach comes from companies that are importing from China. They rely on the recovery of Chinese manufacturing for their own growth because their business models are based on Chinese imports. In the U.S. this includes Apple and Walmart. 

The risk in these investments is that company growth depends not just on U.S. demand but also the rapid restoration of supply chains and logistics. This business model may be threatened by increasing levels of U.S. sanctions.

These are five options provided for investing in the continuing Chinese economic recovery. Despite the anti-China push by some countries, there is no doubt that the Chinese economy will continue to expand both domestically and globally. According to the latest release of China's National Bureau of Statistics, the country's GDP in the second quarter grew by 3.2 percent year-on-year, contrasted with a 1.6 decline in the first quarter year-on-year, which is a strong signal that the economy is recovering steadily. Therefore, the Chinese economy should be part of every investment portfolio.

(If you want to contribute and have specific expertise, please contact us at opinions@cgtn.com.)