2018 was a rough year for Chinese stocks as signs of a slowing Chinese economy and the U.S. – China trade war soured investor sentiment. But recently, Chinese stocks have been outperforming their U.S. counterparts on hopes that the U.S. and China are nearing a truce in their ongoing trade war, and as the Chinese economy shows signs of stabilization.
While uncertainty definitely remains, the new year has brought new life back into these stocks and many Chinese stocks have rallied so far this year.
And some argue that the rally is far from over.
“I like China; I’d be buying at current levels,” Newton Advisors’ Mark Newton told CNBC late last month. “Take a look at the FXI. We’ve pushed up to levels right near $43.56. I think this is really an important level. I think if you look back over the last few months getting up above the $43.65 level should cause further acceleration higher.”
The FXI China Large-Cap IShares ETF (FXI) tracks the biggest China-based companies, is up nearly 2% in the last month, and is now at a level not seen since mid-2018. Newton believes that the FXI has been forming a bullish base since the beginning of January, indicating a breakout could be near.
Newton says that the move higher in Chinese stocks could continue over the coming months and possibly “years to come,” and said that “2019 might turn out to be the year of the bull not the year of the pig for China.”
Susquehanna’s Stacey Gilbert agrees, and says that options traders are betting that this trade still has legs.
“When we look at both the ETFs and the options investors certainly are agreeing… that there could be more upside here,” Gilbert said, pointing to traders who are buying FXI calls at the $44 strike level, betting that the ETF will break above that level sooner rather than later. She also noted that investors aren’t just buying the FXI, but rather multiple different ETFs to try to catch any upside from China.
“Overall, I would say yes both on the cash level as well as the options level, investors are positioning bullish for China,” Gilbert said.
Aside from ETFs, there are a few Chinese stocks that investors interested in getting in on this rally should consider.
Thirteen analysts rate Baidu (NASDAQ: BIDU) a Buy. Their price target for the stock is $248.43, suggesting possible upside of 49.91% over the next twelve months. And it’s little wonder why. Baidu just reported a double-beat, fourth-quarter earnings report that showed 20%-plus revenue growth.
BIDU’s forward earnings multiple is 40% below where it was in 2018 and is at its lowest level in years. Just one positive catalyst out of China could send this stock skyrocketing.
Chinese social networking giant Momo (NASDAQ: MOMO) is also a good bet now. In its last quarter, Momo reported 50%-plus revenue growth and 20%-plus profit growth. With revenue growth like that, the company’s 12-times forward earnings is too low, making this stock a bargain. And like with BIDU, any positive developments on a trade resolution or positive Chinese economic news are likely to send this stock soaring.
Analysts give MOMO a consensus Buy rating and their average price target is $45.19, indicating possible upside of 38% over the next twelve months.
Finally, I like Weibo (NYSE: WB). The stock got the short end of the stick in 2018 with shares sinking more than 60% despite the company’s reports of robust user growth alongside stellar revenue and profit growth. But the headwinds that sent shares crashing last year are reversing course in 2019, and the company is still reporting 40%-plus revenue growth.
Weibo is a high-growth company trading at a discount and analysts’ average price target for the stock is $76.63, suggesting possible upside of 23.35% over the next twelve months.