I’m not an expert in geopolitical analysis, nor am I remotely qualified to predict what President Donald Trump might do next. That said, it doesn’t take a doctorate degree in international relations to understand that the recent volatility in Chinese stocks is due to the White House hitting the reset button on North Korea.
During the run-up to the just-escalated trade war between the U.S. and China, the Asian giant had one trump card: North Korean dictator Kim Jong Un. Due to his explosively wild mannerisms and constant threats of nuclear warfare, western nations were understandably on edge. To avoid armed conflict, any conflict must necessarily involve China.
But that was the old calculus. Now, the U.S. has a policy of negotiating with rogue terrorist states to achieve the greater good. Last week’s meeting between Trump and Kim necessarily demonstrated this paradigm shift. Several critics blasted the administration for essentially providing North Korea undeserved credibility, and I can’t blame them for their opinion.
However, we should also consider that President Trump dented Chinese foreign policy. By meeting with Kim, Trump negated China’s leverage in future potential negotiations. In other words, the U.S. will handle North Korea on its own, thank you very much!
And because of this recent dynamic, the Trump administration no longer has to play nice with the China tariffs. As a result, they can squeeze the world’s second-largest economy without fear. Naturally, this portends poorly for Chinese stocks.
That said, investors that want to speculate should stick with names that can weather the volatility, and avoid those that can’t. Here are two Chinese stocks you should consider, and two you should steer clear from.
Chinese Stocks to Buy: China Petroleum & Chemical Corp (ADR) (SNP)
If I’m going to gamble on volatility, I want some of my speculative activity levered towards large blue chips. That aptly describes China Petroleum & Chemical Corp (ADR) (NYSE:SNP), one of the country’s biggest companies with a market capitalization of nearly 22.6 billion.
Unlike other Chinese stocks, though, SNP shares are largely victims of industry-specific weakness. Last Friday, the international benchmark Brent crude oil dipped nearly 4% on oversupply concerns. In addition, the dollar gained strength relative to other currencies over the trailing two months.
Based on recent geopolitical events, I expect SNP stock to fall in the nearer-term. However, I wouldn’t let the choppiness detract from the longer-term picture. For instance, the dollar hasn’t always been stable, especially during the Trump administration. Furthermore, global appetite, especially the Chinese variety, is particularly strong.
Therefore, you should view any serious dip in SNP stock as a buying opportunity.
Chinese Stocks to Buy: China Southern Airlines Co Ltd (ADR) (ZNH)
I must admit that I’m not the biggest fan of Chinese stocks, especially with the escalating trade war. But if forced to choose, I want a name not substantially impacted by tariffs. In that regard, few companies fit the bill quite like China Southern Airlines Co Ltd (ADR) (NYSE:ZNH).
Tariff or no tariff, China attracts tourists from all over the world. In recent years, the country’s tourism revenues increased at double-digit rates. According to their company profile, China Southern Airlines operates the nation’s largest fleet. Furthermore, they offer the largest passenger capacity, ensuring their fair share of that tourism pie.
An additional confidence booster is that ZNH stock didn’t succumb to recent volatility. Last Friday, shares closed up nearly 2%. For the month of June, the airliner is up an impressive 10%.
Chinese Stocks to Avoid: China Mobile Ltd. (ADR) (CHL)
China Mobile Ltd. (ADR) (NYSE:CHL) hasn’t looked good this year, and I’m not surprised why. The so-called Trump tariffs weigh heavily on China’s technology sector. Thanks to the North Korea summit, and to deflect criticism of showing weakness, Trump has many incentives to play hardball.
As you might expect, CHL stock hasn’t responded well. On a year-to-date basis, the Chinese telecom is down nearly 10%. Worse yet, CHL has been charting a bearish trend channel over the past three years. Since April 24th, 2015, the company shed an alarming 40%.
Will things improve for the rest of the year? It’s possible, but I highly doubt it. CHL has gone nowhere since mid-March of this year. If the tariff situation gets worse, China Mobile will remain pressured.
Chinese Stocks to Avoid: China Unicom (Hong Kong) Limited (ADR) (CHU)
On the surface, China Unicom (Hong Kong) Limited (ADR) (NYSE:CHU) appears a solid recovery story. In its last reporting quarter, China Unicom delivered $11.86 billion in revenue, up 18.5% year-over-year. Its earnings per share jumped to 16 cents, up 220% from 5 cents a year prior.
Unfortunately, CHU stock fails to impress in the markets, where it matters the most. Shares are down more than 7% YTD. But just like rival China Mobile, China Unicom has been largely on a downward slide since April 2015. Plus, its recent technical posture doesn’t provide any confidence.
Ordinarily, I’d gamble on CHU stock based on its financials. However, with U.S.-China relations on the rocks, I must sideline this telecom giant.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
