Once Again, Everything Hinges On China This Year

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Includes: CHIQ, CHL, YAO
by: Emerging Money

By Joseph Hogue CFA

China’s massive program of economic stimulus during the height of the 2008-9 credit crisis showed the political will to keep the economy growing. Most analysts peg 2012 growth between 7% to 9%, although outliers exist.

The government’s most recent Five Year Plan (PDF) sets a notional GDP growth target of 7% by promoting consumption over exports. With three trillion dollars in foreign reserves, the target growth rate is routinely exceeded and additional stimulus is certainly possible.

Inflation has come down significantly and is close to the government’s target of 4%, although additional stimulus could pull prices up. The biggest risk to continued stability is the smooth transition to a consumer-led economy and weakness in the property market.

Appreciation in the yuan relative to the dollar should continue through 2012, although at a slower pace than previous years.

The country’s relative strength in the region, massive amount of reserves and willingness to target a specific GDP goal warrants an overweight position within Asia, even though the region as a whole may underperform other emerging regions.

A few names to watch: China Mobile (NYSE:CHL) provides mobile telecommunications and related services across China.

With more than 600 million customers, the company should benefit as the country transitions to a consumer economy. Revenue has increased over 7.3% over the last two years. The stock has fallen by 23.4% over the last twelve months and currently trades for 10.1 times trailing earnings.

Global X China Consumer (NYSEARCA:CHIQ) holds large and medium-sized companies serving the consumer market in China.

The fund’s largest holdings are in consumer staples (79.5%), industrials (10.7%) and health care (6.5%). The fund has fallen by 25.8% over the last twelve months and currently trades for 13.0 times trailing earnings.

Guggenheim China All-Cap (NYSEARCA:YAO) is a more broad-based fund investing in mainland companies with market capitalization of at least $500 million.

The fund holds 192 stocks with the largest holdings in financial services (26.5%), technology (14.0%), energy (13.6%) and basic materials (10.0%). The fund has fallen by 23.7% over the last twelve months and currently trades for 9.0 times trailing earnings.