The recent rhetoric regarding China's economy hasn't been optimistic. In fact, it's been downright pessimistic. Following a strong start early in the year, the country's retail spending growth slowed dramatically to only 2.5% in July.
Industrial productivity seems to be slumping as well, at the same time that the nation's real estate prices are falling. Beijing's' official numbers indicate July's prices for new homes were 2.4% below their August 2021 peak, while existing-home prices are down 6% from that high. Unofficial reports say China's real estate prices are actually down much, much more than that. Meanwhile, sales of homes in China are declining as well.
Blame relatively weak sentiment mostly, which is prompting too many of China's consumers and corporations to keep their purse strings tied. American business' confidence in China as a market is also bad. In fact, the American Chamber of Commerce's measure of five-year business opportunities in China recently fell to a record low.
All of this says China's economy is on the defensive, and explains why Chinese stocks are collectively now at a 10-month low. The nation's central bank was worried enough to dish out a surprise interest-rate cut last month, and earlier this month it lowered its banks' reserve requirements hoping to spur more lending.
But as hockey legend Wayne Gretzky explained his success, "I skate to where the puck is going, not where it's been." Applied to investors, it means don't worry about the current condition of China's economy; focus on what it will look like in the foreseeable future.
And with the country's recent stimulus measures already starting to take hold, the foreseeable future looks promising.
Take August's retail sales growth as an example: Retail spending reaccelerated to 4.6%, handily topping expectations for an improvement of only 3%. Industrial productivity growth lurched 4.5% higher, too, from July's slower pace of 3.7%.
Consumer prices also bounced back last month after the country suffered an alarming degree of deflation (indicating evaporating demand) in July.
Image source: Getty Images.
There's still plenty to fix to be sure, but in China's case, it might be darkest just before dawn.
UBS Group's head of China strategy James Wang says, "We see several signs which historically would have suggested that the equity market may have bottomed out," adding that there are reasons for more optimism.
Presuming he's right, now's the time to start wading into the best of the best of Chinese stocks. Two tickers stand out above the rest.
1. Alibaba
It's such a common pick that it's almost become a cliché. Yet e-commerce giant Alibaba Group Holding (BABA 0.59%) is still one of the top ways to play a rebound in China's consumer spending.
We've already seen one key reason: last quarter's sales growth. Despite the brisk economic headwind that was already blowing by that time, Alibaba's top line improved by 14% year over year during the three months ending in June.
Analysts expect that growth pace to cool off in the latter half of this year, but even so, projected full-year revenue growth of 9% in this tough environment is impressive. Even more impressive is the expected top-line growth of 10% next year. Earnings are forecast to grow accordingly.
There's also a value argument to be made: Alibaba shares are currently trading at a little more than a modest eight times next year's expected per-share profits of $10.01.
Perhaps the chief reason to take a swing on Alibaba stock in the wake of its steep sell-off from its late-2020 high is qualitative rather than quantitative. New CEO Eddie Wu is stepping into his role with a compelling vision, calling for the company to be "user first" and "AI-driven," or otherwise risk being displaced.
And while the following might not fly in other parts of the world, Wu's stated plans to promote people born after 1985 sends a message to the world that he's building the company to be relevant for a digital-native crowd that will remain its customers for decades.
Only time will tell if his quest for youth at the expense of experience will be the right one. Alibaba's newly mandated start-up culture, however, is the sort of thing that employees as well as investors can latch on to. That's powerful, whether or not it's fair to older employees.
2. Trip.com
The other ticker well positioned to benefit from the brewing rebound in China's consumer economy is online travel agent Trip.com (TCOM 0.36%).
Although China's exit from heavy-handed COVID-19 lockdowns late last year was wobbly from its start, the nation's travel business proved mostly immune to that softness. It's still firing on all cylinders, in fact.
State-owned China Railway reports it sold a record-breaking 22.88 million train tickets two Fridays ago, while domestic hotel bookings for the nation's Golden Week holiday from late September into early October are well above pre-pandemic norms. China's domestic airlines are also preparing for demand that will exceed pre-pandemic Golden Week travel.
And that's just a taste of what's to likely come despite the country's and the world's questionable economic health. A recent survey commissioned by travel consulting firm IPK suggests that 80% of China's residents, motivated by lingering pent-up demand, intend to travel abroad within the next 12 months, and to do so more than they have in the past, now that it's relatively easy once again.
These numbers aren't rooted in mere hope, either. Boeing just raised its 20-year outlook for China's demand for new passenger jets, saying that "domestic air traffic in China has already surpassed pre-pandemic levels, and international traffic is recovering steadily." It's a long-term outlook that's sure to see ups and downs, but the fact that Boeing publicized its improved optimism in the current, not-so-hot market environment speaks volumes.
Given this backdrop, it's no surprise that analysts expect Trip.com's top line to continue its big rebound through the end of this year, and expand another 17% next year. Earnings should grow accordingly.
What is surprising is that Trip.com shares remain down as much as they do despite the company's resilience. The stock's current price around $36 per share is roughly 40% below analysts' consensus target of $49.43.
