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3 Defensive Sectors For China’s Downturn

Global luxury stocks have dropped in response to China’s slowing economy. Investors may want to consider taking a look at defensive sectors in the current environment. Here are three of them that might help you weather the storm.

Health Care

Health care has long been viewed as an appealing defensive sector to invest in during bad times. When the economy isn’t doing well, health care spending doesn’t necessarily slow down — it’s an essential need.

In China, not only is health care a great defensive play, but it’s also a rapidly growing sector due to the country’s health care system reforms and aging demographics. There will be 330 million Chinese over the age of 65 by 2050 and spending is set to hit $1 trillion in 2020, according to McKinsey & Company.

Private hospital chains such as Aier Eye Hospital Group are likely to boom, especially as China looks to relieve some of the burdens on its government-run health care system.  The key problem is that the system lacks a functioning primary care system, which is often the first line of defense for patients with less severe illnesses. Many patients flock from the countryside to hospitals in first-tier cities to see specialists, even for minor illnesses such as fevers and headaches. This overburdens hospitals and resources in big cities, where patients frequently wait for hours to see a doctor.

The pharmaceutical side is also poised for major growth, with China’s consumer pharma market expected to grow from US$123 billion in 2017 to $145-175 billion by 2022, according to research firm IQVIA. This makes it the second largest market in the world after the United States. China’s population is aging, but its residents now have the purchasing power to buy the appropriate medicines and treatments.

Lastly, China’s pharma exports are also set to benefit from the government’s “Made in China 2025” industrial policy. In the past, its pharma manufacturing industry centered on producing cheap generic drugs. But going forward, the government may invest massive amounts of money in the sector’s research and development efforts and turn it into a global powerhouse for innovative new drugs. This is because China is looking to wean its population off its reliance on expensive imported drugs from multinational pharmaceutical companies.

Utilities

Utilities are a well-known defensive play for investors facing a slowing economy. In China, utilities are government-run oligopolies. Because they provide a public service, their growth is often capped by the government.

Telecom stocks such as China Mobile and China Unicom are examples. Since utilities have predictable demand, however, they have stable cash flows that enable them to pay solid, steady dividends over the long run.

Another option is to invest in electricity and gas utilities based in Hong Kong. These companies are relatively unexposed to China’s economy as they depend primarily on domestic demand in Hong Kong. The utility companies such as Power Assets and CLP are owned by leading tycoons such as Li Ka-Shing and the Kadoorie family respectively. The tycoons receive large amounts of cash from the dividends that these companies pay out, so it is unlikely that the dividends will be cut.

Defense & Military

Investors might want to consider China’s military expansion in 2019. In 2017 China spent just $228 billion on defense, compared to $597 billion in the United States, according to research from the Stockholm International Peace Research Institute.

And yet China is now investing heavily in military and defense as it aims to expand its interests abroad.

China’s Belt and Road Initiative is one reason for its expanded military ambitions. The initiative aims to finance and build infrastructure in emerging markets. Chinese workers are often sent to these countries to work on these projects, and Chinese companies often hire military contractors to protect them in dangerous situations.

Frontier Services Group, a third-party logistics & military contractor run by former Blackwater founder Erik Prince, is one such company that could possibly benefit from this trend. Another company is AviChina Industry & Technology, which makes helicopters, planes, and avionics systems.

In summary, investors have many fruitful areas to explore, even though some bears believe China might experience a slow-down in 2019.

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Disclosure: Motley Fool Hong Kong is not licensed by the Hong Kong Securities and Futures Commission to carry out any regulated activities under the Securities and Futures Ordinance. Ker Zheng doesn't own any shares mentioned above.