The Chinese market has been in the news recently for several reasons. Apple (AAPL), after a very long courtship, finalized and formalized their deal with China Mobile (CHL). I have had my say on that and still believe that this removes one of the major obstacles to AAPL's growth.
Throw in a truly innovative new product from the company this year and a return to $700 doesn’t look too far off, only this time with some justification, but I digress.
Yum! Brands (YUM) reported slightly higher (2%) same store sales in China but missed expectations that were closer to 6%, and much of the increase was driven by a half price promotion. This has generally been interpreted as bad news for YUM and the stock has justifiably fallen, but, like the AAPL news, this tells us little about China in general.
2013 was a tough year for investors in China's stock market, as you can see from this chart for the SPDR S&P China ETF (GXC).
GXC spent the first half of the year losing ground, and then recovered to finish essentially flat. It is now hovering around support levels around $75 and looks like a decent buy to me.
Of course, any investment in China is about growth, but it is also about expectations. The problem that GXC and Chinese stocks in general had this year wasn't that the Chinese economy wasn't growing; just that it was "only" growing at around 7.6%. That 7.6% growth, though the lowest in 14 years, was actually slightly better than the Chinese Government's official target of 7.5%. Growth targets were set relatively low because of fears about inflation, but the pace of growth last year has allayed those fears somewhat. Core inflation came in at 2.6%, well below the official target of 3.5%.
So far, the 7.5% growth target has been reiterated for 2014, but assuming that inflation stays in check there must be a possibility of an upward revision of that target. This matters enormously in China. We in the West have become somewhat cynical of government issued economic targets, and for good reason. They usually appear to be a combination of guesswork and wishful thinking more than anything. In China though, despite a lot of economic liberation, the Government still has the power to force the economy toward its stated goals.
Even if targets aren't revised upwards, expectations for economic growth in China are now a bit more realistic, so a period of steady growth and restrained inflation could see some speculative interest that will give stock prices a boost. GXC isn't the only way to play this; the iShares FTSE/Xinhua China 25 Index Fund (FXI) would be another, or a few individual stocks would serve the same purpose.
The aforementioned China Mobile would be a good starting place. CHL was moribund to say the least throughout 2013 and, despite the AAPL deal, is still trading at around $48, down over 15% from February 2013 highs. This is largely due to the issue of new telecom licenses to 11 potential competitors including Alibaba. Telecom, though is an area where established, large companies have an enormous advantage. There is a reason why upstart companies lag behind AT&T (T) and Verizon (VZ) here in the US, for example. The Apple deal will only serve to increase the dominance of CHL and 2014 could be a great year for the stock.
At the other end of the 2013 performance scale, but still with a bright outlook, is internet security company Qihoo 360 Technology (QIHU).
QIHU roughly tripled in 2013. They had followed a path well worn by internet companies the world over and given away their services for many years before finding a way to effectively monetize their popularity last year. Their move into search has been successful, with a 23% market share established, and they have a new Chief Business Officer who should help with monetizing that popularity, too. Dr. John Liu comes to QIHU from a little outfit that knows a thing or two about turning search engine popularity into cash, Google (GOOG).
The days of explosive, double digit growth in China may be behind us, but with a wary eye on inflation and a fear of emerging market bubbles, I would venture to say that that is a good thing. Sustainable growth and reasonable price increases look set to continue through the next year and, whether you chose to take a broad based approach using ETFs or find a couple of individual stocks such as CHL and QIHU, investing in China looks like a good idea.