How China's Struggling Economy May Affect Your Stock Portfolio!

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Market News and Short-Term Predictions

It's been a while, but $AAPL has finally broken through $170 and is trading at levels we haven't seen since November 2023. 

A big part of that I believe is related to China's weakness which is the theme of this week's newsletter. 

China is a very important market for Apple, accounting for almost 20 percent of the company's total sales. After entering the Chinese smartphone market in 2010, Apple’s sales in the region grew more than 20-fold within five years, peaking at $58.7 billion in 2015 before gradually falling back to $40.3 billion in 2020, when COVID-19 heavily affected Apple's business in the region. Luckily for Apple, that slump was short-lived as sales surged back almost 70 percent in 2021 and exceeded $70 billion in each of the past two years.

Amid a slowdown in the Chinese smartphone market and persistent rumors about a ban on iPhones at government agencies and state-backed companies, Apple's China business remains a topic of concern for the company's shareholders, however. Given its size and the fact that it has grown from barely existent to one-fifth of the company's total sales in little more than 10 years, it's no surprise that investors keep a close eye on China. After all, it remains the world's largest smartphone market and the potential for future growth in the region is still significant.

And to make matters worse, Apple sold 24% fewer iPhones in China in the first six weeks of 2024 than a year earlier, according to a Tuesday report from Counterpoint Research.

Now Apple stock at the beginning of the year was still trading with a P/E in the lower 30s showing it was expecting some level of growth to continue. The news around China and the discontinuation of the EV department while seen as being behind in AI has put a damper on the growth expectations over the past couple of weeks.

Just look at this chart of AAPL, we haven't seen a daily RSI of under 30 in a while.

The reason I talk about all this and still make the meme above and be interested is Apple is still a massive cash cow. 

Now that P/E has come down to 26 that just means less growth is being built into the price right now. For a cash cow business that I equate to more of a KO or PEP these levels I would consider closer to fair value (but not a massive bargain).

A P/E of 15 would be a back truck up and load.

I still remember back in 2015 buying into Apple when the P/E was in the low teens. I sold my Apple position closer to $190, but have been looking to get back in at the right valuations.

Fear around China is starting to get priced in and when that happens it means if China recovers over the next few years, growth expectations may start to pick up again and valuation multiples expand again. What's the saying, "Be greedy when others are fearful"?

If we look at Fidelity's latest update on global business cycles across countries, China has been in a contraction period for a while. But when China inevitably starts to recover and people are less fearful, the larger opportunity for the upside is missed out on.

I don't think it will be a light-switch situation. I believe dollar cost averaging into US stocks that have weakness due to China will pay off in the longer term (a similar issue is happening with TSLA).

One more direct way to get exposure to a recovery in China would be to buy a country ETF like MCHI. I don't usually invest in single stocks in China because I don't know the companies that well and there is more audit risk on a single name. 

If you buy a basket of stocks for an entire economy that everyone is afraid to touch right now, that may pay off nicely in 5 years. Of course, due to regulations and geopolitics, investing directly in China will carry some extra risk!

Lessons to Be Learned

With tax season upon us (for my fellow US followers), I did want to mention that there is still time to utilize one of my favorite vehicles for long-term investments. That's right, the Roth IRA!

As a general rule, you have until tax day to make IRA contributions for the prior year. In 2024, that means you can contribute toward your 2023 tax year limit of $6,500 until April 15.

If you wondering what are some of the benefits of investing using a Roth IRA are, here are some of them:

• Tax-Free Growth: Contributions are made with after-tax dollars, allowing your investments to grow tax-free, meaning you won't pay taxes on investment gains.

• Tax-Free Withdrawals in Retirement: Since taxes are paid upfront, withdrawals during retirement are tax-free, assuming you meet the age and holding period requirements.

• Flexibility for Early Withdrawals: You can withdraw your contributions (but not earnings) at any time without taxes or penalties, offering more accessibility compared to other retirement accounts.

• Estate Planning Advantages: Heirs inherit Roth IRA funds tax-free, making it a strategic option for legacy planning.

• Investment Options: Roth IRAs typically offer a wide range of investment choices, enabling you to tailor your portfolio according to your risk tolerance and investment goals.

• Potential for Tax Diversification: Having funds in a Roth IRA can provide tax diversification in retirement, allowing you to manage your tax bracket by deciding which accounts to withdraw from each year.

Figured I would throw that out there if anyone has already gotten a bigger tax refund from 2023 or if they forgot!

Portfolio Update

Stock Watchlist

Stocks: TSLA, LLY, ADSK, SBUX, NOW, CELH

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MSW Investor Tool Kit

Below are the websites and applications I use to be a better investor. It is a mix of free and paid, but below is the breakdown:

Charting : (free) StockCharts.com - Great for bringing in technical indicators like RSI/MACD/MA on stocks I am charting.

Stock News/Analysis: (paid) Seeking Alpha - Useful for stock ideas, comparative charting, dividend history, and earnings results. Sign up with the link for $50 off and a 7-day free trial.

Stock Valuations: (paid) Finbox - Easy way to look at different valuation methods, financial statement trends/ratios, future estimates, and analyst targets. Sign up with the link to get $5 off a premium membership.

Historical Metrics/Ratios: (free) MacroTrends.net - Useful for pulling in historical valuation multiples and other financial metrics.

Stock Screening: (free) Finviz - The best for pulling stocks for further analysis based on specific criteria (market cap, industry, PEG, PE, debt, EPS growth, etc.).