China’s growth story could make these 2 shares worthwhile investments

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2 mins. to read
China’s growth story could make these 2 shares worthwhile investments

While the Chinese growth story has been a major focus for investors for a number of years, it is showing little sign of slowing down. Wage growth and wealth levels are expected to surge higher over the medium term, and this could create increasing demand for a range of consumer goods.

Companies such as Diageo (LON:DGE) and Whitbread (LON:WTB) already have exposure to China. This could provide them with a tailwind over the coming years. This may make them increasingly desirable investments for investors looking to capitalise on what could be a strong period of growth for the world’s second-largest economy.

Growth prospects

While China’s GDP growth rate is not expected to be as high as it has been in recent years, it is still forecast to remain above 6.5% in 2018 and 2019. To put that into perspective, the US economy is expected to grow by at least 2.5% per annum during the same time period. As a result, China remains a relatively fast-growing economy even at a time when the US is performing well. And compared to the UK’s forecast GDP growth rate of 1-1.5% per annum over the same time period, it remains highly appealing.

Changing outlook

While China’s growth has been focused on major infrastructure projects in the past, it continues to transition towards a more consumer-focused economy. Over the next five years, the number of middle-class people in the country is expected to double to 600 million. This means that demand for consumer goods could increase dramatically. As a result, consumer goods companies that are already operating in the country could see demand for their products rise.

Investment potential

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In the case of Whitbread, it has a foothold in the country through its Costa brand. It also has an ambitious expansion programme ahead which will dovetail with the planned demerger of the division from Whitbread. This could create a more focused operation that is better-placed to deliver an increased store estate in China over the coming years.

With sector peer Starbucks currently opening 500 new stores per year in China and generating impressive sales growth, there seems to be a clear growth opportunity for the sector which could provide the company’s bottom line with a tailwind over the long run.

Similarly, Diageo is seeking to increase its exposure to China. Last week it submitted a proposal to increase its stake in Chinese liquor maker SJF, with it seeking to up its stake to 60% from around 40%. SJF is one of the biggest-selling spirits brands in China, and it would be unsurprising for the company to further seek to expand its presence there over the medium term. Alongside its efficiency drive, this could provide it with an improving investment outlook.

Clearly, the general Chinese growth story is not breaking news. But with the potential for a rapid rate of growth in demand for consumer goods over the next 5-10 years, Whitbread and Diageo could be two means for investors to capitalise on it.

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