Two weeks ago, I talked to you about investing in Europe.
Many see the Continent as a better alternative to U.S. markets.
Stocks there trade significantly cheaper and offer higher dividend yields.
However, as I laid it out in my recent essay, the reason why those stocks are trading lower is weak long-term growth projections… and that’s not going to change for the better any time soon.
With Europe out of the question and U.S. stocks looking expensive, how about investing in China?
It is, after all, the second-largest economy in the world. It also has superior growth projections to the United States and a seemingly less-inflated stock market.
On the surface, it looks like a better choice.
But is it?
Markets can be very different from what they seem to be at first glance, and you often must look under the hood to get the real picture.
In the case of China, when I look more closely, I don’t see anything attractive.
The Biggest Problem With Authoritarian Regimes
Let me start by mentioning the obvious—the Chinese government.
While China has moved on from communism, it has kept many of the old principles.
I guess its current economic model could best be described as centrally planned capitalism or authoritarian capitalism.
Whatever you want to call it, the problem with this system is the same as with any that has too much government oversight—it kills creativity.
And, unfortunately for China, creativity is essential for innovation, which is the primary driver of organic economic growth.
This is a key reason why the economic performance of centrally planned regimes has trailed that of capitalist countries throughout history. If you look at the greatest innovations of the 20th century, they’ve mostly originated in Europe and North America.
It is also why, despite significant efforts, China’s technology sector still can’t keep up with those in the West.
You can put a gun to a man’s head and force him to labor, but you can’t force him to be creative.
What Is The Truth And What Is Fiction? No One Knows With China
The authoritarian leadership alone is a deal-breaker for me when it comes to investing in China.
But then there are all the lies.
No one knows with certainty the economic situation in China, because the published figures can’t be believed. It has become common practice, for example, to subtract 2% from the official GDP figures.
And the lying isn’t limited to the Chinese government. Chinese corporations do it, too. Just last month, news broke out that Luckin Coffee, the Chinese equivalent of Starbucks, faked nearly half its revenues. That’s preposterous. Especially as they’ve apparently been doing it for years.
And this is hardly the only case. A few days later, iQIYI, the Chinese equivalent of Netflix, got popped for inflating their numbers by roughly the same amount. I’m ashamed to admit that this was one of the companies I recommended in the past.
This constant misinformation coming from all sides makes it incredibly difficult for an investor to get a clear picture.
And if I can’t tell what’s true and what’s not, buying Chinese stocks becomes more speculation than investing. A practice I’m not comfortable with.
This is why, at least for the near future, I’m staying out of China.
The Safest Way To Profit From The Chinese Growing Middle Class
Despite all I’ve said, it’s undeniable that soon China will become the largest economy in the world.
With a consumer base nearing 1.5 billion, it’s difficult to ignore.
If you’re looking to profit from that market, I think the safest bet is to invest in U.S. companies with significant exposure to the Chinese consumer.
To that end, I suggest you avoid tech companies, as they’re the most likely targets of trade war sanctions.
The only one from that space that I like is Tesla (NASDAQ: TSLA). Elon Musk just confirmed that the Shanghai plant is doing great, and, given the high demand for electric vehicles, I believe it will be a success.
A safer alternative, however, is to invest in consumer products such as beauty care and fashion. Stocks I would recommend you look at are Estee Lauder (NYSE: EL), Nike (NYSE: NKE), and Tapestry (NYSE: TPR). They generate 17%, 17%, and 15% of their revenues respectively from China.
And, best of all, they’re all headquartered in what is still the most stable big economy in the world—the United States of America.