Seven Election Year Chinese Stocks

This story appears in the April 9, 2012 edition of Forbes magazine.

Last year was a dismal year for Chinese stocks. The popular FTSE/Xinhua China 25 Index of blue chips fell nearly 18%. This year it has already gained 7.9%, and I think Chinese stocks will shine in 2012.

Readers may remember that a year ago I wasn’t very bullish. Now I am. China’s stars are in alignment right now. China frequently confounds stock market prognosticators because it has a penchant for straying markedly from other broad global indexes year-by-year over the decades—even from emerging markets. It’s hit or miss.

Over the last 20 years China’s GDP growth has been relatively weakest in the two calendar years prior to the ­National Congress, or election. Despite the rhetoric, growth accelerates during an election year (2012) and the year after. So China is priming the pumps of its economy, and the ripple effect will be felt by stocks.Nevertheless, I think I have discovered a neat way to forecast Chinese stock market cycles. China’s stock market is inextricably tied to politics. China’s powerful Communist Party leadership has a cultural history of trying to depress the economy (and hence stocks) in varying ways two years before elections, which occur every five years. Then they gun it as the election approaches.

Bear in mind that China is no real democracy. It’s a rigged one-party system with some internal competition. Control comes from the top. The “election” is largely for show.

In 2010 and 2011 monetary growth imploded, fiscal stimulus declined, taxes were kept on high and China’s growth rate slowed. Scary but false stories of overbuilding were leaked from inside the government.

But last fall the Chinese cut income taxes and simplified them. The result will be to eliminate more than two-thirds of the taxpayers from its rolls, by my estimate.

Another pump-priming maneuver has been China’s delay in implementing Basel III banking rules. They don’t go into effect until after 2012, and reserve requirements were cut by half a percent in December. China has even allowed banks to delay recognition of bad loans.

There’s more. In November China reduced its energy production tax. Plus, for the first time it is letting some municipalities issue bonds. And for those who are worried about residential real estate: In 2012 China will ­create 7 million affordable housing units and by 2015 another 36 million. So sit back and watch as China’s money supply expands and its stock market rises. Here’s my buy list of stocks trading on U.S. exchanges.

With 40% market share, China Life Insurance Company (LFC, 41)spans individual, corporate and group life products, annuities and asset management. The company has a great direct sales organization, and it targets the emergent middle class. The stock sells for 15 times my estimate for 2012 earnings.

China Telecom (CHA, 59) is the leader in broadband services with over 170 million customers—64% of the national market. It’s the third-largest mobile provider, with 117 million 3G wireless subscribers. The stock is cheap. Buy it.

You can also charge up your cellphone and your portfolio with Shenzhen’s BYD (BYDDY, 6), which started in rechargeable batteries and is now making over half the world’s mobile phone batteries. Besides manufacturing batteries, BYD is also China’s sixth-largest carmaker, producing more than 700,000 autos annually—and the country’s top-selling compact model, the F3.

Yanzhou Coal Mining (YZC, 22) is a leading integrated source of thermal coal for power plants and metallurgical grade coal for steel furnaces. It’s very cheap at eight times my 2012 earnings estimate.
I also like Huaneng Power International (HNP, 24), one of China’s largest independent power producers, serving 18 provinces. Electrical demand in China is growing at double-digit rates. The stock sells at ten times my 2012 earnings estimate.

Aluminum Corporation of China (ACH, 13) is the nation’s largest and lowest-cost producer. It sells for 30% of my 2012 sales estimate and eight times my 2013 earnings estimate.Money manager Ken Fisher’s latest book is Markets Never Forget (But People Do): How Your Memory Is Costing You Money–And Why This Time Isn’t Different (John Wiley, 2011). Visit has home page at www.forbes.com/fisher.China’s biggest oil and natural gas producer, PetroChina (PTR, 148), benefits from the Communist Party’s priority on energy independence and security. China has the world’s largest shale gas resources—yet it isn’t finicky about fracking. It sports a 3.4% dividend and sells at 12 times my 2012 earnings estimate.

source: forbes.com

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