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INVESTMENT: Stocks give hope, But should be invested in selectively
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Stocks give hope,

But should be invested in selectively

By Anthony Lawry

BT 201703 INVESTMENT 01Cautiously optimistic - that is the summation of how various economists have described China's economic outlook for February. While these phrases should be viewed with a relative degree of skepticism, they appear to be somewhat accurate. There is a fair degree of optimism in some circles as the political risk surrounding a number of issues between the United States and China has subsided.

Recently, United States President Donald Trump finally talked over the phone with Chinese President Xi Jinping. Not only did President Trump tell President Xi that the United States would continue to recognize the One China Policy, but there is much speculation to suggest that this may have been a part of a larger trade-related deal alleviating worries of a trade war between the world's two largest economies. While this is mostly guesswork, various journalists and political insiders at Politico magazine are suggesting that if a deal was reached the details would surface over the upcoming weeks.

BT 201703 INVESTMENT 02If no news arrives, then Trump might have blinked and major geo-economic power conflict is still on, but with the United States in a much more weakened position. Nonetheless, investing in China should still be viewed from a hopefully optimistic perspective. This holds true for a number of reasons. First and foremost and as noted last month, Chinese leadership transition taking place later in the year will still require a degree of necessary economic stability. Because of this, there are likely to be measures that will ensure overall macroeconomic to maintain a healthy, but normal level of GDP growth. It also means that even if there is an unforeseen stock market collapse or some sort of 'Black Swan' event, measures would be taken to ensure the health of the overall economy. Xi may have won this round, but in the next battle, the one of international trade, Trump has the upper hand. Either way, this tug of war will only be able to show its true face over the upcoming months.

Regardless, China's economic outlook appears to be steady with a number of optimistic data points suggesting that the economy is healthy. Because of this and the aforementioned issues regarding US/China relations, equities look like a positive way forward in the immediate future despite the large levels of monetary outflows that China is enduring. Because of the recent surge in US equities in the aftermath of the election, prospects of increased stimulus and tax cuts in the US, transition in Beijing and most importantly the prospectus of a US/Chinese political and trade détente, this column opines that Chinese equities are in a strong position to make gains in the upcoming month. That being said, this is, again, a cautiously optimistic position. Because of this, equities with low beta, or risk, are preferred over those with higher beta and higher return potential.

Where to provisionally park your money

BT 201703 INVESTMENT 03While these options may seem to be few and far between in the Chinese market in light of two market corrections over the past year and a half, they are out there. Of particular interest is a number of A-shares and old economy stocks that Credit Suisse recently pointed out. In view of a stabilizing Chinese economy (particularly the industrial economy) and earnings rebound in the industrial sector, as well as rising risk of peaking China tech stock valuation, 2017 could be a year of A-shares outperforming HK/US listed China/HK stocks and so-called old economy stocks (oil companies, mining state-owned enterprises and others) outperforming new economy stocks (think Baidu, Tencent, and other tech companies). In spite of this, Chinese H-shares have fared better than expected over the last year compared to the year before. The iShares MSCI China ETF (MCHI) has gained 5.7%, while Deutsche X-Trackers Harvest CSI 300 China A-Shares ETF (ASHR) is up only 3.8%. That is not to say new economy stocks have not done well. Alibaba Group (BABA), for instance, has soared 10.2% already. But the immediate future holds better for the old economy stocks.

Because of the desired stability, there is also a possibility that China will want to maintain high levels of infrastructure investment growth in a similar manner to the US. This means a number of stocks in capital goods, materials and real estate stocks could see a high degree of increased valuation. Either way, the bottom line remains the same; China looks like it will have a positive February and a positive 2017 from this current vantage point. While this may change in the unforeseeable future, entering the market at this point may still hold some profit margins if the market exit is timed correctly. Either way, it should be taken into consideration that this market appears extremely bloated. Yet, it is still this column's opinion that growth will increase. Cautious optimism may be a positive outlook in the short-term, but medium- and long- terms are different stories altogether.

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