If investors were unsure about the importance of China to their financial futures, events over the last couple of weeks have confirmed that the performance of the world’s second-largest economy matters greatly. And, while not all FTSE 100 companies have exposure to China, their share prices are still dependent upon its outlook, since a rapidly falling wider index almost certainly means declining share prices even for UK-focused stocks.
Of course, some companies have considerable exposure to China and to the wider Asian economy. Their share prices have, therefore, experienced savage falls in recent days due to the high level of uncertainty regarding the growth rate that can be sustained by China over the medium to long term.
As a result, many investors may feel that now is the right time to avoid stocks with relatively high exposure to Asia. Certainly, their share prices are likely to remain volatile in the short run but, for longer term investors, a highly enticing opportunity to buy low and, down the line, sell at a higher price, appears to have presented itself.
For example, HSBC (LSE: HSBA) has seen its share price fall by almost 13% in the last month which, while disappointing for its investors, means that it now offers superb value for money. In fact, HSBC trades on a price to earnings (P/E) ratio of just 9.7 which, for a major global bank, appears to be unjustifiably low. That’s especially the case when HSBC is forecast to increase its bottom line by 17% in the current year, thereby putting its shares on a price to earnings growth (PEG) ratio of just 0.6.
Furthermore, HSBC currently yields a whopping 6.4% from a dividend that is covered 1.6 times by profit. This means that there is ample headroom so that even if HSBC’s profit does disappoint, shareholder payouts are still likely to move upwards.
Similarly, Burberry (LSE: BRBY) also appears to offer excellent value for money at the present time. Its shares have fallen by 16% in the last month and, as a result, now trade on a PEG ratio of just 1.6. This indicates that Burberry’s share price could move significantly higher over the medium to long term, since the company has a very strong brand and relatively high levels of customer loyalty across the globe. Certainly, a slowdown in China would affect its short to medium term financial performance, but with Burberry having exposure to a developed world that is improving in an economic sense (as well as parts of the emerging world), its profitability is likely to impress in 2016 and beyond.
Meanwhile, mining stocks such as BHP Billiton (LSE: BLT) have perhaps been the most affected by the apparent Chinese slowdown. Commodity prices have slumped and BHP’s share price has declined by 43% in the last year, which puts it on a dividend yield of 7.3%. Clearly, there is a chance of a dividend cut moving forward – especially since BHP’s profit is not due to cover forecast dividends in the current year. However, even if this occurs, the company’s shares appear to be worth buying as a result of improved efficiencies and restructuring that is taking place at the current time. This could bolster investor sentiment and allow BHP to improve its position relative to peers so as to provide higher margins and profitability over the medium to long term.
