As the Year of the Dragon begins, the pros name sectors — and stocks — to play the Chinese market

Published Mon, Feb 12 20246:13 PM EST

Amala Balakrishner @in/amala-balakrishner @_amalabk

A slump in foreign direct investments, deflation and a shake-up in the stock market has put pressure on the Chinese economy, causing several investors to turn cautious on the Asian powerhouse as it marks the start of the Year of the Dragon. Chinese stocks had an eventful week last week — with the benchmark Shanghai Composite Index hitting a five-year low of about 2,650 points on Feb. 5, before edging up to end the week at 2,865.90. Meanwhile, the CSI300 Index — capturing China's top 300 stocks by market capitalization — capped its best week since 2022 with a 3.2% gain, while the CSI1000 Index for small-cap stocks advanced 9% — its biggest weekly increase since 2020. A slide in Hong Kong-listed Chinese shares on Feb. 9, however, proved that investors may still have lingering concerns on the prospects of Chinese stocks in the new year. This year features the dragon in the Chinese zodiac — which is viewed as one of the most auspicious signs incorporating wealth, strength and prosperity. As the festive season gets underway, Redmond Wong, market strategist at investment firm Saxo, sees several opportunities to play the market. "I'm still positive and optimistic on China right now. However, I think that the cyclical upturn has been much slower than I expected. I don't want to be binary and say China is collapsing — because it is not. I believe the strength of the economy has been a little weaker, but it is still recovering and still growing," he told CNBC Pro in January. China's economy continues to grow, with gross domestic product for 2023 coming in at 5.3%. The International Monetary Fund expects growth in the Asian giant to slow to 4.6% this year , no thanks to the prolonged slump in its property market and subdued external demand. Still, several sectors — and stocks — make good investments right now, says Wong. "If you look at value stocks, you will still get multiples that are low enough when cash flows become steady – that may be something investors can still buy if you're not hoping for a lot of growth," he explained. Value stocks are known as companies appearing to trade at lower prices compared to fundamentals. Elsewhere, Morningstar's analysts suggest that "China equities are relatively still cheap." "We expect Chinese consumption to remain subdued and there remains uncertainty around the impact of supportive policies in the absence of targeted measures to absorb excess real estate inventory to help revitalize property demand. We think it will be a slow recovery, so while we expect nibbling at attractively priced entities, we do not see a strong rebound across the broad market," analysts at the firm wrote in a Jan. 25 report. Technology and manufacturing picks With China's technology and advanced manufacturing sectors featuring prominently among investors in the past year, it is no surprise that Saxo's Wong and Morningstar's analysts are looking at them keenly. "Enhancing productivity and technology self-reliance will remain the two structural themes of China's long-term development strategy. These are unlikely to wither despite the cyclical swings of the economy. The technology and advanced manufacturing companies that produce tangible products tend to benefit from favorable industrial policies," Wong said, naming consumer electronics giant Xiaomi , manufacturing companies Zhejiang Sanhua Intelligent Controls and Luxshare Precision as well as industrial automation player Shenzhen Inovance as stocks on his watch. Agreeing, Morningstar's analysts believe the sectors could outperform, adding that they "see value in the semiconductor industry, with inventory levels coming down [while] factory automation should gain on signs that the capital spending cycle has bottomed." Their picks include tech giants NetEase , Baidu and China Unicom . Promise in consumption Beyond tech, Morningstar sees opportunities within the consumer cyclicals and defensive space, even as Chinese consumers have seemingly tightened their purse strings post the lifting of Covid-19 lockdown restrictions. Stocks they see promise in include fast food restaurant chain Yum China , integrated resort and casino operator Sands China and beer manufacturer Tsingtao Brewery. Morningstar gives stocks a rating of between one and five stars, with a top rating indicating that the shares are undervalued. Named as a five-star rated stock, the financial services firm likes Yum China given its "significant room for fast food penetration to go up, driven mainly by long-term secular trends such as: longer working hours for urban consumers; rapidly rising disposable income; and ever-smaller family sizes." Meanwhile, it has a three-star rating on Sands China. Opportunities facing the company include a recovery in the gaming and non-gaming sectors in Macao, the analysts explained. As for Tsingtao Brewery, the analysts like its pure focus on the beer industry and regional focus in Shandong and northern China, which make it "more defensive in a rather adverse operating environment." Boom in green transformation Beyond the traditional sectors, Saxo's Wong is watching an up-and-coming area in China: energy security and a green transformation. Data from the International Energy Agency shows that the Asian giant's clean-energy sectors contributed 11.4 trillion Chinese yuan ($1.6 trillion) to the Chinese economy in 2023, up 30% year-on-year. Companies on Wong's watch include oil players like CNOOC and PetroChina , mining player Zijin Mining , and lithium producer Ganfeng Lithium .