What to buy as China stalls

The outlook for China's economy is gloomy as growth slows. But there are still opportunities for investors, says Matthew Partridge. Here he looks at three solid defensive stocks that should be able to ride out the downturn.

As our expert panel note in this week's Moneyweek magazine round table, the Chinese economy is set to slow down and there is a strong chance that the bust could get nasty for investors. As Killian Connolly puts it "communism and centrally planned allocation of resources never ends well".

However, this slowdown won't just be limited to the mainland. China's role as a major engine of growth for the region means that the mainland's trading partners will be hit. As well as Australia, which we have already covered here this includes Taiwan and Hong Kong.

With this gloomy backdrop in mind, I recently sat down with Fen Sung, who runs the Premier China Enterprise Fund. Unlike us, Fen is a China bull who sees the Asian giant growing by at least 7% per year over the next few years. So a lot of his buys are high-growth companies that require China to keep expanding quickly. However, he did mention three shares that are less dependent on a strong Chinese economy. Since we like defensive plays at Moneyweek, these are worth a look.

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Standard Chartered

Unlike most China fund managers, Fen has zero exposure to Chinese commercial banks. This is "due to concerns over the quality of loans made to local governments". He thinks that the government has been trying to hide the problem by getting banks to extend the maturity of the loans. However, no matter how many times the banks are "persuaded" to roll them over, most of these loans are effectively lost. In fact, we'd go further and worry whether any of the mainland commercial banks are solvent.

However, this is a big opportunity for Standard Chartered (LSE: STAN). It has very low exposure to both Europe and the mainland. This makes it an attractive destination for Asian money if a Chinese hard landing prompts a "flight to quality". It is also possible that a banking crisis may persuade Beijing to start serious efforts to reform its banking system. If this does happen, the model at which Standard Chartered will be well placed to capture a large amount of the market share though this will be a slow process.

TPK and Simplo Technology

Firms that are tied to a product or industry for which there is strong global demand in mature markets are another good bet. Such firms will be less dependent on China. They will also benefit from a weaker currency if Asian growth falters. Two Taiwanese companies that Sung likes are TPK Technology (3673.TW) and Simplo Technology (6121.TWO). Both provide hardware for tablet and laptop computers.

Of the two, TPK seems the better value, trading on a price/earnings (PE) ratioof 8.78. At the same time, its role as a leading provider of touchscreen technology means that it has an important role in market, which is expanding globally at a rapid pace. The launch of Windows 8 should further boost demand.

Simplo is the main supplier of battery packs for the iPad. Given that iPad sales continue to grow, it should expand sales. The PE is 15.27 and the dividend yieldis 2.43%. Last year there were rumours that Apple was unhappy that some of Simplo's batteries turned out to be defective. However, broker Yuanta Securities thinks that the firm will benefit hugely from the launch of the new iPad.

Overall, we'd probably go with Standard Chartered first. It has a solid track record and is an international brand, while Simplo and TPK only went public two and seven years ago respectively.

The global bank is listed on the London Stock Exchange, so it is easy to buy. By contrast, the two tech firms are only listed in Taiwan. This means you'll need a specialist broker such as Redmayne Bentley or a Hong-Kong based online firm.

However, it may be worth the effort - both firms are growing quickly and have great prospects, according to Fen.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri