September is historically a weak month for the stock markets, but the flash Sept. 20 sell-off wasn't a product of general investor fear. It was a China sell-off, as concerns about a looming financial crisis in China sent panic waves across the investing community and triggered a massive sell-off in Chinese stocks in particular.
One of China's leading property developers China Evergrande Group (EGRN.F -66.67%) is on the verge of defaulting on debt worth $300 billion. It is reminiscent of the Lehman Brothers financial crisis of 2008, and investors fear Evergrande's potential collapse could have a domino effect and slow down China's growth.
Yes, the risks are real, but only if you trade and speculate. For a long-term investor, a market sell-off is the perfect opportunity to buy Chinese stocks, especially if you believe China's economy will expand in the years to come. So if you have $1,000 in cash, here are some stocks you'd want to buy during a China sell-off.
How to diversify your risk across China
If you're wary of individual stocks but believe in China's growth potential, consider an exchange-traded fund (ETF) that invests exclusively in Chinese stocks.
Among the several China ETFs to choose from, I like Invesco Golden Dragon China ETF (PGJ 5.40%) for two reasons: This ETF is hugely diversified and not heavily weighted to Chinese tech stocks unlike most China ETFs, and also offers some exposure to mid-cap and small-cap stocks that not many China ETFs do.
As of Sept. 20, the Invesco Golden Dragon China ETF held 99 stocks in its portfolio. The seven-largest stocks included:
- Nio (NIO 3.75%)
- ZTO Express
The one major drawback of the Invesco Golden Dragon China ETF is a high expense ratio of 0.69%. However, this ETF offers a truly diversified exposure to China, which is something you'd definitely want to consider. With the ETF now also barely 5% away from its 52-week low thanks to recent China sell-off, it's an intriguing investment option to consider.
China's EV industry has exponential potential: Here's how to profit
I'm wary of Chinese tech stocks, but one industry that I believe has exponential potential is the electric-vehicle industry. China wants 25% of all new cars sold to be electric by 2025. There's every chance the nation will hit that goal much sooner given that EVs accounted for 12% of its total car sales in just the first half of 2021.
China's Minister for Industry and Information Technology recently called out the EV industry for accommodating too many players and urged the need for consolidation. That has sparked fears of a regulatory crackdown on the EV industry, which isn't far-fetched given China's intense regulatory actions on multiple industries of late.
Consolidation in China's EV industry looks inevitable as smaller companies prefer to sell themselves out, which also means bigger growth opportunities for heavyweights like Nio and BYD (BYDDY 5.50%)
Nio is often referred to as "the Tesla (TSLA -1.14%) of China" given its plans to overtake Tesla in China by launching a mass-market brand through three new models lined up for next year. If successful, the move should catapult Nio to new heights.
Right now, Nio has three running all-electric models and is targeting higher market share by offering sedans that compete head-on with Tesla's models but come at a lower price point. Nio's battery swapping service is another hugely attractive factor for potential buyers as it gives them the option to even cheaper cars without batteries and instead rent batteries and swap them at swapping stations as they run out of charge under subscription-based packages. It's a win-win for buyers.
Moreover, Nio's efforts to establish itself as a brand through offbeat offerings like banded products, coffee houses, and co-working spaces for Nio owners is boosting customer loyalty.
Nio is also growing at a torrid pace: Its August sales jumped 48.3% year over year and it bagged a record number of orders in the month, which should put to rest near-term concerns about fewer expected deliveries in coming months thanks to the global semiconductor chip shortage. Record orders positions Nio for solid growth in 2021 given that its deliveries from January through August jumped 157% to 55,767 cars. A founder-led company, Nio may not be profitable just yet but is free-cash-flow positive.
BYD, on the other hand, is already profitable. BYD is more than just an electric-car company: It makes hybrids, commercial vehicles like buses and trucks, monorail system, and even manufactures rechargeable batteries, BYD also has a semiconductor business that it plans to spin-off.
That makes BYD one of the most diversified EV stocks out there. Even better, it is already the largest electric-car company in China: It cornered 16% of China's new energy vehicles market in June, according to the China Association of Automobile Manufacturers as stated by BYD.
In August, BYD sold 67,630 passenger vehicles, including 60,508 new energy vehicles (NEVs). So while its overall sales surged 90.5% year over year, sales of NEVs shot up 331.9% year over year. NEVs include battery-electric, plug-in hybrid, and fuel-cell electric vehicles.
BYD already manufactures battery-electric buses and motor coaches in the U.S., is aggressively expanding into Europe, and tapping newer markets like Columbia. With Warren Buffett's Berkshire Hathaway also putting its weight behind BYD, it's one of the most compelling stocks to buy in a China market sell-off.