China’s biggest stimulus package since COVID-19 – 3 share ideas to benefit

Alibaba is one of the world’s largest e-commerce companies. It has many other strings to its bow too, like cloud computing, media and entertainment, and logistics.

Jumping on the internet wave early, and focusing on putting consumers first saw the group become the dominant player in China across many areas. However, growth has been difficult in recent years, given that China’s economy has been struggling to get going again since the pandemic.

A few management missteps and an intense regulatory crackdown have also increased competitive pressures, leading to a significant fall in the valuation.

Despite the post-stimulus rally, its valuation is still around half of its long-run average. We think that’s pretty undemanding, given its diverse revenue streams and strong cash generation.

Management’s putting this cash to good use.

It’s buying back shares at depressed levels and investing heavily in cloud computing, which it sees as its main route to growth.

It’s already the market leader for cloud computing in China. But compared to its western peers, like Microsoft Azure and Amazon Web Services, there hasn’t quite been the same high-octane lift-off.

There’s no assurance that China will regain its crown as the world’s fastest-growing consumer market. Fresh stimulus should move things in the right direction, but investor sentiment around Chinese companies still remains fragile.

Continuing momentum will rely on management improving operational efficiencies and ramping up cloud growth. If it can hit these goals, then there could be a strong recovery ahead. But the task isn’t easy, and neither is guaranteed.

A member of the share research team holds shares in Alibaba Group

China is the world’s largest producer of steel, accounting for over half of global steel production. That means it’s a major customer for miners that produce iron ore, a key component for making steel.

BHP is a mining giant and China is its largest customer, making up over 60% of total sales last year. Iron Ore is the key product, but it also has large operations in copper and coal (mainly steelmaking).

Low costs are BHP’s key attraction. Western Australia iron ore, which produces the bulk of the group's iron ore, has some of the world's lowest production costs. The same can be said for the Escondida copper mine in Chile. That feeds into margins that tend to be higher than its peers.

Copper is the longer-term focus from a growth avenue, and after unsuccessfully trying to buy parts of Anglo American, the full strategy still needs some refining. Production has been ramping up at existing sites though, and plans are underway to explore new sources.

We see the investing for growth strategy keeping a lid on any major changes to shareholder returns, but there’s plenty of room to flex the balance sheet if needed.

We think BHP’s low-cost, high-margin assets are attractive and if China makes a serious and prolonged effort to drive growth, there could be an upside to current expectations.

However, BHP's premium valuation puts it first in the firing line if economic conditions, and commodity prices, end up worse than expected.

The expansionary moves made by Chinese leaders should act to improve consumer confidence and put more money in consumers’ pockets. It’s hoped that this will convince them to save less and spend more, but time will tell.

Many luxury companies around the world have had a fresh jolt of optimism off the back of this.

European powerhouse LVMH is one of those names hoping to benefit. It owns luxury brands such as Louis Vuitton, Christian Dior, Tiffany & Co, and many more.

Sales in the important Asia region made up almost a third of the total €41.7bn in the first half, of which Chinese consumers account for a significant chunk. There were fears that China’s economic struggles would mean it wouldn’t prop up sales this year as they had in the past.

It’s too early to tell if the Chinese stimulus package will lead to a sustained economic recovery. But given LVMH’s products are generally bought by more affluent individuals, even if there are tougher times ahead, its typical customers are still likely to be better off than most.

The group’s high price points are supported by what we view as genuine creative and marketing superiority. Being able to charge more means that operating margins are healthy too, which has dripped into free cash flow and underpins its ability to pay dividends. Although, no shareholder returns including dividends are ever guaranteed.

We like the long-term opportunity at LVMH, thanks to its unrivalled stable of brands. The valuation’s sitting just below its long-run average, which doesn’t look demanding to us. But sentiment in the near term is likely to be driven by conditions in China, so some ups and downs along the way are to be expected.