U.S-listed Chinese Consumer Stocks Have a Bright Future
posted by The Traveller on Tuesday, November 02, 2010
I believe investors should own U.S.-listed Chinese stocks that are focused on domestic consumption. Those stocks will see double benefits from current developments and it is hard to imagine that investors won't see stellar returns with a buy-and-hold strategy with Chinese consumer stocks. Here's why:
China is in the midst of a gigantic transition from the world's number one exporter and producer of goods to the leading consumer nation of the planet. While its general economy grows 8-10% per year, domestic consumption already grew about 18% year-to-date. We get widespread reports about rising wages in China and about government incentives to further stimulate the domestic economy. However, the domestic economy is nowhere close to being strong enough to compensate the negative impact on international trade if China continues to appreciate its currency. More aggressive measures to strengthen domestic consumption are very likely at this point.
The rising Yuan is the driving force behind these developments. China is facing enormous pressure from all its trade partners to appreciate its currency, but instead of opting for a rapid full appreciation, China is looking at gradual appreciation of up to 5% each year for the next several years. Auriga came out with a note this week, estimating the total scale of appreciation to be between 25% and 40% in five years. The firm calls gradual appreciation a "determined government policy" and "too big to ignore" for investors.
Chinese companies targeting domestic consumers will find have a larger market for their products with strong and sustainable growth. They will have more potential clients and customers and those will have deeper pockets. Underdeveloped industries like domestic and international travel, luxury goods, entertainment and advertising will rise out of infancy, and purchasers of manufactured goods - especially in rural China - will benefit from subsidies and government stimulus.
The double benefit for U.S.-listed Chinese companies is of course the stronger Yuan. Those companies derive their revenue in Chinese Yuan and report their numbers in U.S. Dollar. Additionally to generating higher revenues and earnings in Yuan those will be worth more in U.S. currency, and 25-40% is a significant amount. And don't forget that the Yuan appreciation will also affect most of the companies' assets.
It's almost a "no-brainer," however the key to success for investors is to pick quality names, companies that are all set to benefit from these developments. Look for healthy quality stocks in industries like advertising, meat processing, agriculture, travel, entertainment, home appliances, automobiles, liquors, gambling, and there should be many more.