What are we looking for?
Canadian companies with significant exposure to China’s market.
The screen
China’s stock market, represented by the MSCI China Index, surged more than 35 per cent last month, driven by aggressive stimulus measures aimed at jump-starting the slowing economy. While this could indicate the onset of a broader recovery for the world’s second-largest economy, questions remain regarding the sustainability of this rally.
For investors looking to tap into China’s recovery with a more cautious approach, Canadian companies with substantial revenue from China present an alternative to direct investments in Chinese equities. These firms’ diversified operations offer downside protection if the Chinese rally falters.
Using FactSet’s screening tool, I identified Canadian stocks with Chinese exposure by applying the following criteria:
- traded on the S&P/TSX Composite Index;
- market capitalization greater than $1-billion;
- Chinese-geographic revenue exposure greater than 10 per cent, using FactSet’s proprietary algorithm.
The eight remaining companies were ranked by their total revenue exposure to China.
What we found
Most of the companies that passed the screen are involved in mining and materials production, sectors critical to China’s manufacturing-driven economy. With weak consumer demand remaining a key challenge for China, these materials companies are well-positioned to benefit if stimulus measures effectively boost domestic spending. Notably, over the past month, these eight companies have delivered an average total return of 18.9 per cent, significantly outperforming the S&P/TSX Composite’s 6.2-per-cent return.
Methanex Corp. MX-T, the world’s largest methanol producer, ranked No. 1 on our screen with 27.4 per cent of its sales coming from China. Methanol is gaining traction as a cleaner alternative to fossil fuels, and, according to an MIT Technology Review study, China is betting big on methanol-powered vehicles to reduce carbon emissions. A rebound in consumer spending and travel could fuel increased automobile demand, driving up methanol consumption and thus benefiting Methanex.
Teck Resources Ltd. TECK-B-T, a diversified natural resources company, ranked No. 2 on our screen with 27.4 per cent of its revenues derived from China. Teck has been ramping up its copper production, a critical material for construction, manufacturing and infrastructure projects. If China’s real estate sector stabilizes, demand for copper, alongside other products in Teck’s portfolio, could rise, providing a substantial tailwind for the company.
The information in this article is not investment advice. The author assumes no liability for any consequence related directly or indirectly to any action or inaction taken based on the information contained above.
Arjun Deiva, CFA, is an MBA candidate at the University of California, Berkeley, Haas School of Business.