Time to Go Shopping as Trade War Declines Cheapen Chinese Stocks!

Tony Sagami

I admit it: I'm an economics nerd. I'd rather read annual reports and Form 10-Ks than a James Patterson or Stephen King book. And my favorite magazine is The Economist.

The Economist isn't an easy read. Each weekly issue approaches 100 pages in length, has few photos, and is dense with the type of details that only an economics nerd could love.

I mention The Economist because the October issue was pure gold, covering the growing trade friction between the U.S. and China.

That trade friction, by the way, is one of the key reasons behind this month's stock market sell-off. So, anybody who is heavily invested in the stock market should pay attention to it.

President Trump has levied tariffs ranging from 10% to 25% on $250 billion worth of Chinese goods. That has been met with similar (but smaller) tariffs on U.S. goods entering China.

Moreover, Trump seems willing to intensify the trade war thanks to expectations that the longer and more painful the tariffs, the more leverage he'll have in upcoming trade negotiations.

That tough trade talk may have spooked the U.S. stock market a bit. But it has had a much worse impact on the Chinese stock market, which is in a full-blown bear trend.

The Shanghai Composite Index has lost 50% of its value in the last two years, and 30% of its value so far this year. And most "experts" expect Chinese stocks to fall even lower.

But I'm not so sure about that.

Buy the Fear

Chinese stocks are attractive because of the beating they've taken on fears about trade wars and slowing economic growth .

However, the Chinese economy is growing more than twice as fast as the U.S. — and the Chinese government is pouring billions into "advanced technology, artificial intelligence, quantum computing and biotech," according to The Economist.

A trio of China's biggest tech stocks — Alibaba (BABA), Tencent (TCEHY) and Baidu (BIDU) — look especially attractive.

  • Alibaba is the Amazon of China, an e-commerce giant that is growing like a weed. In the second quarter of this year, Alibaba saw its revenues surge 61% on a year-over-year basis.
  • Tencent is the Facebook of China. This social networking site is also a widely popular online gaming site and the second-largest mobile-payment platform in China.
  • Baidu is the Google of China. It reported a 32% year-over-year increase in Q2 revenues.

By the way, all three of these stocks trade in the U.S., so you don't need a special overseas account to buy them. It is just as easy and just as inexpensive to buy them as Amazon, Facebook or Google.

If you're more of an ETF investor, take a look at the Invesco China Technology ETF (CQQQ) or Global X NASDAQ China Technology ETF (QQQC). Both own sizable stakes in the above three Chinese tech giants.

Still not convinced about these all-American ways to play China on the cheap right now? Then consider this …

China joined the World Trade Organization in 2001, and its GDP was only 13% of the United States'. That has grown to 60% today, and the International Monetary Fund projects it will be 88% by 2023. Then it should overtake the U.S. sometime in the 2030s.

I talk to a lot of investors. And even though China is already the second-largest economy in the world after the U.S., most of them don't own a single share of Chinese stock. That's just dumb.

Every long-term investor needs a meaningful stake in China, and the 50% haircut that the Shanghai Composite has experienced is your opportunity to get started.

Of course, that doesn't mean Chinese stocks can't trade lower. They might! But at these prices, Chinese stocks sure look like a bargain to me.

Best wishes,
Tony Sagami

About the Technology Analyst

Even in the worst years for stocks, Tony was twice named “Portfolio Manager of the Year” by Thomson Financial. He was one of the first to introduce computer software for trading stocks. And in the early 2000s, he wrote “The Supernet,” providing a vision of the future internet that was far ahead of its time.

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